AFF 502 Chapter Notes - Chapter 14: Time Deposit, Asset Allocation, Reinvestment Risk

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silverhedgehog450

1 Jun 2017

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Saving money you did not spend, money left over after your consumption. Investing using the savings that you have and making it work putting it in investments to earn a rate of return. The only way to earn the required rate of return is by putting money into the right investment that is expected to generate the required rate of return. Basic characteristics of an investment: return on investment: Total return: income return + capital gain return: rate of return: Rate of return (r) or holding period return (hpr): r (or hpr)= [p1 p0 + d] / p0. P0 = price at the beginning of the holding period. P1 = price at the end of the holding period. D = the income return (interest or dividend) during the holding period. Realized rate of return: rate that has actually occurred in a past period.

Related Questions

You have finally saved $10,000 and are ready to make your first investment. You
have the three following alternatives for investing that money:
â¢ A Microsoft bond with a par value of $1,000, an interest rate of 4.2 percent on its par value in interest, sells for $1,115 , and matures in 4 years
â¢ Southwest Bancorp preferred stock paying a dividend of $2.63 and selling for $26.25
â¢ Emerson Electric common stock that is selling for $60 with a par value of $5.
The stock recently paid a $1.88 divided, and the firm's earnings per share has increased from $2.27 to $3.78 in the past 5 years

Your required rates of return for these investments are 3 percent for the bond, 5
percent for the preferred stock, and 12 percent for the common stock. Using this
information, answer the following questions.
1. Calculate the value of each investment based on your required rate of return.
2. Which investment would you select? Why?
3. Assume Emerson Electric's managers expect earnings to grow at 1 percent above the historical growth rate. How does this assumption affect your answers to part a and b?
4. What required rates of return would make you indifferent to all three options?

lilacpig563

2.Camila plans to go for vacation to Australia in 10 years from now. She estimates that she will need $28,870 for the trip. How much does she need to place in a saving account today that earns 8.87 percent per year (compounded quarterly) to accumulate this amount?

Round the answer to two decimal places

Your Answer:

3. You are given an investment to analyze. The cash flows from this investment are

End of year
1. $2,560
2. $2,850
3. $13,140
4. $24,170
5. $8,900

What is the present value of this investment if 5 percent per year is the appropriate discount rate?

Round the answer to two decimal places.

Your Answer:

4. Assume that the inflation rate during the last year was 1.94 percent. US long-term bonds had the nominal rates of return of 5.57 percent. What is the real rate of return for a US long-term bond?

Round the answer to two decimal places in percentage form. (Write the percentage sign in the "units" box)

Your Answer:

5. You currently have $58.1 in your savings account at an annual rate of 6 percent. How many years will it take for this investment to grow to a value of $447.1?

Round the answer to two decimal places.

6. You have accumulated some money for your retirement. You are going to withdraw $83,102 every year at the beginning of the year for the next 19 years starting from today. How much money have you accumulated for your retirement? Your account pays you 11.67 percent per year, compounded annually. To answer this question, you have to find the present value of these cash flows.

Round the answer to two decimal places.

Your Answer:

coppercrow551

2. Camila plans to go for vacation to Australia in 10 years from now. She estimates that she will need $28,870 for the trip. How much does she need to place in a saving account today that earns 8.87 percent per year (compounded quarterly) to accumulate this amount?

3. You are given an investment to analyze. The cash flows from this investment are

End of year
1. $2,560
2. $2,850
3. $13,140
4. $24,170
5. $8,900

What is the present value of this investment if 5 percent per year is the appropriate discount rate?

4. Assume that the inflation rate during the last year was 1.94 percent. US long-term bonds had the nominal rates of return of 5.57 percent. What is the real rate of return for a US long-term bond?

Round the answer to two decimal places in percentage form. (Write the percentage sign in the "units" box)

5. You plan to buy a house in 9 years. You want to save money for a down payment on the new house. You are able to place $114 every month at the end of the month into a savings account at an annual rate of 12.89 percent, compounded monthly. How much money will be in the account after you made the last payment?

6. You currently have $58.1 in your savings account at an annual rate of 6 percent. How many years will it take for this investment to grow to a value of $447.1?

Round the answer to two decimal places.

7. You have accumulated some money for your retirement. You are going to withdraw $83,102 every year at the beginning of the year for the next 19 years starting from today. How much money have you accumulated for your retirement? Your account pays you 11.67 percent per year, compounded annually. To answer this question, you have to find the present value of these cash flows.

Round the answer to two decimal places.

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AFF 502 Chapter Notes - Chapter 14: Time Deposit, Asset Allocation, Reinvestment Risk

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