FINA 3000 Lecture Notes - Lecture 1: Cash Flow, Quiznos, Interest Rate Risk

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amberseal891

30 Nov 2017

School

University of Georgia

Department

Finance

Course

FINA 3000

Professor

Pope

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Document Summary

If we add a few definitions, we can move cash flows across time . A lump sum is a single cash flow at one point in time . also called an amount. We need to define four terms: pv, fv, n, and r. Pv = present value = value of cash flow today. Fv= future value = value of a cash flow at time n. Fv= pv x ( 1 + r )1. Fv= 100 x (1 + . 05) = 105. The single period problem asks you to move cash flows ahead or back one period (usually one year). The risk attached to a cash flow is measured in i. R = interest rate = risk free return (opportunity cost) = bonus return for investment risk. No tow investments carry the same risk; the greater the risk, the more interest you receive. Suppose you need ,000 one year from today to make a down payment on your house.

Related Questions

a. Assume that the FTSE100 stock index level is 5000, and there is a futures contract on the index maturing one year from today. Index stocks will pay dividends over the life of the contract, and these dividends can be reinvested whenever they are received to provide a total cash flow equivalent to 200 index points at futures maturity. Assume also that you can costlessly short sell the index basket of stocks and you can borrow and lend any amount of money at an annual rate of 5%. Assume also that you can ignore marking to market cash flows. What is the price of this futures contract maturing in an year?

Suppose that the futures contract is trading at 5400. What trades would you make today and one year hence to arbitrage? What is your arbitrage profit?

Suppose that the futures contract is trading at 4900. What trades would you make today and one year hence to arbitrage? What is your arbitrage profit?

1) Analysts predict that your company's earnings will grow at 40% per year for the next five years. After that, earnings growth is expected to slow to 2% per year and continue at that level forever. Your company has announced earnings of $2 million. What is the Present Value of all future earnings if the interest rate is 10%? (Assume all cash flows occur at the end of the year.)

2) The house costs $200,000. You have $29,000 in cash that you can use as a down payment on the house, but you need to borrow the rest of the purchase price. The bank is offering a 30-year mortgage that requires annual payments and has an interest rate of 8% per year. What will your annual payment be if you sign up for this mortgage?

3) You decice you need to save $2,000,000 by the time you are 65. Today is your 30th birthday and you decide starting today, and continuing on every birthday including your 65th birthday, that you will put the same amount into a savings account. If the interest rate is 7%, the amount you deposite each year to make sure that you will have $2,000,000 in the account on your 65th birthday?

4) You have an investment opportunity that requires an initial investment of $9,500 today and will pay $9,000 in one year. What is the IRR of this opportunity?

byzantiumscorpion602

a )A lender offers you a mortgage with an APR of 4.20% withmonthly compounding. What is the effective rate of interest chargedby the lender?

b) An investor is considering an opportunity that pays thefollowing cash flows:

Year	1	2	3
Cash Flow	$110.00	$132.00	$151.00

The investor thinks interest rates will rise over the next fewyears, so he wants to use different rates based on the year. Forthe first year, he will use a discount rate of 3.69%. For thesecond year, he will use 5.91%, and for the third year, he will use7.44%. Find the value of this investment today.

c) A real estate investment has the following expected cashflows:

	Year	Cash Flows
	1	$10,600.00
	2	$26,800.00
	3	$35,100.00
	4	$42,500.00

The discount rate is 6.00 percent. What is the investment'sfuture value at the end of the fourth year?

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FINA 3000 Lecture Notes - Lecture 1: Cash Flow, Quiznos, Interest Rate Risk

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