1An Agency Problem Is Prone To

b. What would be the value of each bond if they had annual coupon payments?

You have been making payments for the last 25 years and have finally paid off your mortgage. Your original mortgage was for $345,000 and the interest rate was 5% per year compounded semi-annually for the entire 25 year period. How much interest have you paid over the last 5 years of the mortgage?

| |finance the balance. How much will each monthly loan payment be if they can borrow the necessary funds for 30 years at 9% per |

a) Assuming the opportunity interest rate is 6%, what is the present value of the second alternative?

a. What is the CD’s value at maturity (future value) if it pays 10 percent annual interest?

Assuming Ben takes a 5 year loan to pay the one year cost of $89,500 at 5.4% borrowing rate.

11. Managers of POM Corp. wish to maximize the long term share price of the firm. Investors are aware of this. In this situation, if the managers of POM announce an equity issue, investors will conclude that the share price is __A1__. Therefore they will __A2__ the shares at the offered price. Anticipating this condition, the managers would __A3__.

c) The present value of $500 to be received in one year when the opportunity cost rate is 8 percent (discounting):

8. If you want to purchase a home. You have $15,000 to put down. All you can afford is $1,500.00 per month and you do not want to finance for more than 15 years @ 6% interest, (your taxes will be $85.00 per month and insurance $200.00 a month), what is the amount you can pay for your home? (Show all your work)

Interest cost is the imputed interest on the liability during the year. The pension obligation also changes because of actuarial gains or losses that occur with the pension plan when the actuaries change their assumptions. For example, the pension liability will decrease and the company will record an actuarial gain if the actuary reduces the present value of the expected future payments (for example, by increasing the discount rate or decreasing the rate of wage increases). Last, the pension obligation decreases when benefits are paid to retirees. Paying benefits satisfies the obligation. c. The pension plan‟s assets increase when the assets earn a return (interest, dividends, capital appreciation). When securities and investments held by the plan drop in value, the plan‟s assets fall too. The plan assets

* A new project idea which requires an investment of $2 mm and will generate total cash flows (including any salvage or terminal value) next year of either $4mm (recession) or $8mm (boom). The firm has not yet raised the cash to make this investment, but the market is aware of the investment opportunity.

11. A 65-year-old wishes to convert the cash value of his insurance policy into an annuity. He can select an annuity that will last 15 years or one that lasts 20 years. If the cash value is $450,000 and interest rates are 5.25%, how much less per year will he receive if he chooses the 20-year annuity?

C. The proportion of each payment that represents interest as opposed to repayment of principal would be lower if the interest rate were lower. If the interest rate is low on a loan, the amount of repayment is low.

A final important factor concerning the expansion project is potential investments to accelerate profit. ABC Company has the option to purchase additional equipment. One thing necessary before investing in something is to calculate the net present value of the potential investment. “The net present value of an investment is the difference between the present value of cash inflows and the present value of cash

(Compound value solving for I) at what annual rate would the following have to be investe