short homework due by 20 hours
Financial Management
Unit IV Assignment
This assignment will allow you to demonstrate the following objectives:
· Calculate the annual payment on a loan using the present value of an annuity.
· Use discounting to determine the present value of an annuity.
· Calculate the future value of an annuity and periodic annuity payments.
· Determine the present value of a bond.
Instructions: Answer the questions directly on this document. When you are finished, select “Save As,” and save the document using this format: Student ID_UnitIV. Upload this document to BlackBoard as a .doc, docx, or .rtf file. Show all of your work.
1. Your supervisor has tasked you with evaluating several loans related to a new expansion project. Using the PVIFA table (table 9.4 in the textbook), determine the annual payment on a $400,000, 8% business loan from a commercial bank that is to be amortized over a five-year period. Show your work. Does this payment seem reasonable? Explain.
2. Dan is considering borrowing $500,000 to purchase a new condo. Based on that information, answer the following questions. Show all work.
a) Calculate the monthly payment needed to amortize an 8% fixed-rate 30-year mortgage loan.
b) Calculate the monthly amortization payment if the loan in (a.) was for 15 years instead.
c) In a few sentences, explain the effect of a smaller loan period. How does it influence the monthly payment and interest?
3 Use a financial calculator or computer software program to answer the following questions:
a) Melanie is trying to save money for retirement and has a future goal of $600,000 at the end of 20 years. Determine the present value of her goal using a discount rate of 11%.
b) How would the present value change if the $600,000 is to be received at the end of 15 years instead? Explain the impact and show your work?
4. Your friend Anne is planning to invest $400 each year for four years and will earn a rate of 6 percent per year.
a) Determine the future value of this annuity due if her first $400 is invested now. Show your work.
b) What is the difference between an annuity due and an ordinary annuity? Explain.
5. Jimmy has a bond with a $1,000 face value and a coupon rate of 9.5% paid semiannually. It has a five-year life.
a) If investors are willing to accept a 14 percent rate of return on bonds of similar quality, what is the present value or worth of this bond? Show your work.
b) What is the impact of paying interest semi-annually rather than annually? Explain.
BBA 3301, Financial Management 1
Course Learning Outcomes for Unit IV
Upon completion of this unit, students should be able to:
3. Apply time value of money techniques to various valuation and budgeting problems.
3.1 Calculate the annual payment on a loan using the present value of an annuity.
3.2 Use discounting to determine the present value of an annuity.
3.3 Calculate the future value of an annuity and periodic annuity payments.
6. Evaluate stock and bond valuation.
6.1 Determine the present value of a bond.
Course/Unit
Learning Outcomes
Learning Activity
3.1
Unit Lesson
Chapter 9
Unit IV Assignment
3.2
Unit Lesson
Chapter 9
Unit IV Assignment
3.3
Unit Lesson
Chapter 9
Unit IV Assignment
6.1
Unit Lesson
Chapter 10
Unit IV Assignment
Required Unit Resources
Chapter 9: Time Value of Money
Chapter 10: Bonds and Stocks: Characteristics and Valuations
Unit Lesson
In this unit, we will study two important areas of finance: the time value of money which was introduced in Unit
I and bonds. We will examine the time value of money formulas for present value and future value
calculations. Further, we will learn how the discount rate and time periods factor into the calculations. By the
end of this unit, you will no longer wonder how much to save each year for retirement. You will learn practical
ways of handling money and planning for the future.
Money is an important part of functioning in society as it provides citizens with the means to purchase goods
and services such as housing, food, and clothing. Money, however, does not retain the same value over the
course of time, fluctuating with inflation and other factors in the economy. Moreover, bonds are also
commonly used in the American economic system, often with a goal of earning interest in the future. Bonds
are also subject to fluctuations in value, with time playing a large role in the fluctuations experienced. It is
therefore crucial that individuals understand the time value of money and bonds, in addition to bond valuation,
dividends and stock repurchases, compounding and discounting, and how time value applies to everyday life.
UNIT IV STUDY GUIDE
Time Value of Money and Bonds
BBA 3301, Financial Management 2
UNIT x STUDY GUIDE
Title
Time Value of Money and Bonds
The time value of money is the concept that money
today is worth more than an identical amount in the
future (Martinez, 2013). In turn, calculating time value
of money is important in ensuring the individual
receives the greatest amount of value for his or her
money or bonds (Martinez, 2013). For instance, $100
currently has the value of $100. However, in one year,
that same amount of currency might only be worth
$90.91 if you calculate for a 10% rate of interest over
the course of a year (Chen, 2009). Therefore, it is
more beneficial to take the $100 now rather than a
year from now when the time has created a
devaluation of almost $10 (Chen, 2009). Alternatively,
if a person is offered $100 today or $200 in two years,
they would be better off taking the $200 in two years
as the present value would be around $165 with 10%
interest calculated (Chen, 2009 2011). It is important
that people understand how to calculate the time value
of money before making fiscal decisions regarding
accepting money at certain intervals (Martinez, 2013).
Bonds
Bonds are essentially a promissory note purchased from a company or the government that are guaranteed
to be paid back in full along with receiving regular interest payments (McGowan & Joyner, 2015). However, a
bond differs from a stock purchase in a company, which provides ownership, while also differing from a typical
loan (McGowan & Joyner, 2015). There are around seven different categories of bonds including treasury
bonds, government bonds, investment/corporate bonds, high-yield bonds, mortgage-backed bonds, municipal
bonds, and foreign bonds (McGowan & Joyner, 2015).
Bond Valuation
Bond valuation is an important part of the bond consideration process. Since the market value of bonds can
fluctuate, bond valuation provides a technique for determining the value of a bond currently and in the future
when it matures (Johnson, 1995). Investors will therefore examine the present value, or face value, of the
bond, the coupon payment, the required rate of return, or interest, and the length of time until the bond
reaches maturity, in order to obtain the unknown price, or value, of the loan over time (McGowan & Joyner,
2015).
Dividends and Stock Repurchases
Dividends, or a sum of money regularly paid by a company out of its profits, can become challenging when
dealing with bond valuation as lowered company profits may result in an inability to pay the bond payments
on time (Johnson, 1995). Similarly, stock repurchasing may have additional transactional costs in which gains
to shareholders are obtained at the expense of bondholders who made an agreement for payments with
different shareholders (Maxwell & Stephens, 2003). It is, therefore, important to pay close attention to bonds
that are provided to corporations who are at a higher likelihood to engage in share repurchasing than their
governmental counterparts (Maxwell & Stephens, 2003).
Time matters when it comes to money.
(Thitiakarakiat, n.d.)
BBA 3301, Financial Management 3
UNIT x STUDY GUIDE
Title
Compounding and Discounting
In order to ensure that a bond will be lucrative in the future, the investor will want to use compounding and
discounting in order to calculate the potential earnings or losses that may be incurred when purchasing a
bond (McGowan & Joyner, 2015). For instance, compound interest is a method used to calculate the
application of time to money or bonds and will provide the investor with the amount he or she will earn at the
maturity of the bond or after a certain length of time left in a savings account accruing interest (McGowan &
Joyner, 2015). Discounting, however, provides the investor the means to calculate the present value of the
money he or she would receive in the future, which will display whether it is worth waiting for the money or if
the investor will be at a loss in the long run based on present money value (McGowan & Joyner, 2015).
Why is compounding and discounting so
important? It affects your planning and
long-term decision-making! For instance,
assume you are 25 and just finished your
MBA. You are fresh out of college with a
new job, so you decide to invest in the
stock market for your retirement. Your
ultimate goal is to have $1 million when you
retire. Let’s assume you will earn 10%
annually on your stock investments. How
much will you need to invest at the end of
each year to reach that goal by the age of
65? The answer is $2,259.41 based on
calculating the present value (PV) of each
payment for each year, which is $40. The
easiest method for computing PV and
future value (FV) totals is Excel since you
can use the insert function command to
input rates, time periods, etc. In our
example above, what would happen to the
payments if the rate dropped from 10% to
8%? The amount per year would increase
to $3,860.16.
What happens if you wait until you are 40 before you start to put away money for retirement? How would that
impact your annual contribution? Based on a 25-year time period with a 10% rate, you would need to invest
$10,168 each year in order to meet the $1 million retirement goal. That is a significant amount more than the
$2,259 we calculated earlier based on 40 years. This example illustrates why one should never put off saving
for retirement. The longer you wait, the more you will need to save each year to meet the goal. The moral of
the story is to celebrate your graduation from school, but once you get that new job, start saving!
Time Value of Money in Everyday Life
Time value of money and bonds is important in everyday life as individuals are often facing future fiscal and
investment decisions that can affect their future financial success. As a general rule, currently having money
is more valuable than having money later (Chen, 2009). For instance, the present value of $100 is currently
$100. If an interest rate of 5% is added, in one year that $100 would be worth $105. However, when the
discounted interest rate of 5% is applied, the $100 a year from the present will only be worth $95.24, making
the $100 more valuable today (Chen, 2009). The same can be compared over longer lengths of time, with
differing interest rates, both compounded and discounted, in order to gauge whether the investment will be
lucrative.
The power of compounding—it can have a huge impact on
your savings!
(Siraanamwong, n.d.)
BBA 3301, Financial Management 4
UNIT x STUDY GUIDE
Title
Moreover, the same process may be used when addressing home loans to ensure that the value of the home
will be retained with the cost and the interest rates. Finally, everyday credit card purchases have a time value
because of the interest that is tacked on. In turn, the purchase of a cup of coffee for $3 may end up costing
the consumer $15 if the balance is not paid immediately. These costs can add up and, therefore, make time
value an important concept for all consumers to understand before making current and future financial
decisions.
In summary, we looked at the time value of money concept and its many uses. We examined the different
applications and how the concept is useful for planning. We highlighted key areas of bonds and the different
types. Finally, we studied interest rates and their direct impact on bonds. All of these concepts combined give
a great overview of a very important topic in financial management.
References
Chen, J.-H. (2009, September). Time value of money and its applications in corporate finance: A technical
note on linking relationships between formulas. American Journal of Business Education, 2(6), 77–88.
https://files.eric.ed.gov/fulltext/EJ1052630.pdf
Johnson, S. A. (1995, September). Dividend payout and the valuation effects of bond announcements. The
Journal of Financial and Quantitative Analysis, 30(3), 407–423. https://doi.org/10.2307/2331348
Martinez, V. (2013, Spring/Summer). Time value of money made simple: A graphic teaching method. Journal
of Financial Education, 39(1/2), 96–117. https://www.jstor.org/stable/41948701
Maxwell, W. F., & Stephens, C. P. (2003, April). The wealth effects of repurchases on bondholders. The
Journal of Finance, 58(2), 895–919. https://doi.org/10.1111/1540-6261.00550
McGowan, C. B., & Joyner, D. T. (2015, August). Computing bond values to teach time value of money
principles. Applied Finance and Accounting, 1(2), 64–72. https://doi.org/10.11114/afa.v1i2.862
Siraanamwong. (n.d.) ID 87329169 [Image]. Dreamstime. https://www.dreamstime.com/stock-illustration-
power-compounding-vector-illustration-image87329169
Thitiakarakiat, C. (n.d.). ID 92759653 [Image]. Dreamstime. https://www.dreamstime.com/stock-photo-close-
up-time-stack-money-coins-time-value-money-concept-business-finance-theme-saving-money-future-
image92759653
Learning Activities (Nongraded)
Nongraded Learning Activities are provided to aid students in their course of study. You do not have to submit
them. If you have questions, contact your instructor for further guidance and information.
The Unit IV Knowledge Check Quiz will give you practice using the math skills that you have learned in this
unit. It will be very helpful practice for the assessment in this unit, and you are encouraged to complete this
prior to taking the assessment. (PDF of Unit IV Knowledge Check)
https://online.columbiasouthern.edu/bbcswebdav/xid-129149246_1
https://online.columbiasouthern.edu/bbcswebdav/xid-129135384_1