Problem 1 (20 Points)

A bond is maturing in 7 years and paying annual coupons of 5%

If the annual required rate of return is 4%, compute:

1. The PV of the bonds;

2. The duration of the bond;

3. The modified duration (volatility);

4. Interpret your result in question 3.

Problem 2 (20 Points)

You have the following bond maturing in 4 years:

Face Value = 1.000$;

Semiannual dividends = 35$;

Annual Interest rate= 5%

1. Compute the PV of the cash flows?

2. What will happen to the bond price if the interest rate decreases to 6%?

3. What will be the price if the annual interest is 4%?

Problem 3 (30 Points)

Valuation of companies can be done by forecasting a series of cash flows and then estimating a horizon value.

Your firm projects net cash flow in years 1 through 5 as follows:

Year 1

Year 2

Year 3

Year 4

Year 5

100 Million $

120 Million $

135 Million $

140 Million $

147 Million $

Assume that the company is expecting a growth rate of 6% starting year 5 and a discount rate of 12%; compute the PV of the company?

Show the details of all your calculations.

Problem 4 (30 Points)

Compute the pay back, discounted pay back, NPV and IRR of the following projects;

Assume a discount rate of 10%

C0

C1

C2

C3

Project A

-2000

500

500

5000

Project B

-2000

500

1800

0

Project C

-2000

1800

500

0