ECON201 Lecture Notes - Lecture 5: Zero-Coupon Bond, Cash Flow, Current Yield

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tancockroach82

12 Apr 2018

School

University of Waterloo

Department

Economics

Course

ECON201

Professor

Predrag Rajsic

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ECON201 Full Course Notes

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Econ 206 chapter 4 the meaning of interest rates. Learning objectives: calculate the pv of future cash flows and yield to maturity on the 4 types of credit market instruments. Present value is used to compare the value of one kind of debt instrument to another. To calculate simple interest rate (i), the formula is: (cid:4666)(cid:883)+(cid:4667) Where (principal) represents the initial value and (i) represents the interest rate. Thus = 5(cid:2868: (cf) = future cash flow, (i) = interest rate, (n) = number of years (cid:4666)(cid:2869)+(cid:2868). (cid:2869)5(cid:4667)(cid:3118) , . 04. Yield to maturity is the interest rate that equates the present value of cash flow payments received from a debt instrument with its value today. 4 types of credit market instruments: simple loan. Lender provides a certain amount of funds that must be repaid at the maturity date along with incurred interest over that period of time.

Related Questions

The following are all True and False Questions:

1. Book Value represents the remaining underpreciated investment on the books after the depreciation charges to date have been subtracted

2. For the same interest rate, compounding interest does not always yield a larger future worth value than a simple interest rate

3. For any project, if its present worth is negative, the project will be rejected

4. The capatalized cost of a finite-life alternative can be obtained by calculating its annual worth over one life cycle and then multiplying by the interest rate

5. The depreciation amount is not directly included in CFBT (Cash Flow Before Tax), but depreciation is directly invlolved in the taxable calculation

6. Using incremental analysis of alternatives, the alternatice with the highest B/C ratio is selected.

7. Plotting PW vs i can be used to determine the IRR for a given project.

8. In conducting an incremental analysis, at any round, two alternatives can be compared and the alternative with the highest internal rate of return can be selected for comparison in the next round.

1 Two sets of cash flows are shown in the table below. If these sets are equal at 8% interest rate, determine the unknown value, X.

Year	0	1	2	3	4	5
Cash Flow, Series I	$125	$100	$75	$50	$25	$0
Cash Flow, Series II	$X	$2X	$3X	$4X	$5X	$7X

2 A deposit of $10,000 now at a interest rate of 10% per year will accumulate in 20 years to an amount equal to _______________.

	A.	$54,600
	B.	$61,500
	C.	$67,280
	D.	$51,900

3 Which of the following relationships between compound interest factors is not correct?

	A.	Single Payment Compound Amount Factor and Single Payment Present Worth Factor are reciprocals.
	B.	Sinking Fund Factor and Uniform Series Compound Amount Factor are reciprocals.
	C.	Capital Recovery Factor and the Sinking Fund Factor are reciprocals.
	D.	Capital Recovery Factor and Uniform Series Present Worth Factor are reciprocals.

4 What is the present worth of a series of ten deposits of $200 per year at 6% made at the end of each year?

	A.	$1,672
	B.	$1,072
	C.	$1,272
	D.	$1,472

5 Determine the net present worth (NPW) of the following cash flows using an interest rate of 7%.

Year	0	1	2	3	4	5	6	7	8
Cash Flow,$	-12,000	2,000	2,000	2,000	2,000	2,000	2,500	3,000	3,500

A.$2,771.05

B.$2,500
C.$1,500
D.$1,771.05

6 At Kal Tech Manufacturing Inc, the time required to make the first unit of an engineered product is 64.1 minutes. Determine the time required for 16^th unit if the learning curve percentage is 90%.

	A.	42.1 minutes
	B.	29.53 minutes
	C.	36.45 minutes
	D.	20.89 minutes

7 A sum of $994.62 deposited at time

Please answer the following questions:

Your firm manages money for a professional tennis player Maria Juarez. She has asked you to give her information about what determines the level of various interest rate. Your boss has prepared some questions for you to consider. Please answer the following questions:

5. What is the pure expectations theory? What does the pure expectation theory imply about the term structure of interest rate?

6. Suppose you observe the following term structure for treasury securities (see grid) below, now assume that the pure expectations theory of the term structure is correct. (This implies that you can use the yield curve provided to âback outâ the marketâs expectations about future interest rates.) What does the market expect will be the interest rate on 1-year securities 1 year from now? What does the market expect will be the interest rate on 3-year securities 2 years from now? Calculate these yields using geometric averages. Maturity Yield 1 year 6.0% 2 years 6.2% 3 years 6.4% 4 years 6.5% 5 years 6.5%

7. Describe how macroeconomic factors affect the level of interest rates. How do these factors explain why interest rates have been lower in recent years?

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ECON201 Lecture Notes - Lecture 5: Zero-Coupon Bond, Cash Flow, Current Yield

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