a)
To calculate: The
Introduction:
Rate of return refers to the gain or loss on the investment. It also refers to the increase or decrease in the capital value of an investment.
The
a)
Answer to Problem 16QP
A bond with a face value of $50 would double its value in 20 years if the rate of return is 3.53%.
Explanation of Solution
Given information:
Person X purchased a bond worth $50. He plans to hold it for 20 years until the value of the bond doubles.
The formula to calculate the rate of return:
Where,
“P” refers to the principal amount invested
“r” refers to the simple rate of interest
“t” refers to the number of years or periods of investment
“FV” refers to the future value or the current market value
Compute the rate of return:
The present value of the bond is $50. He plans to invest for 20 years until the value of the bond doubles. Hence, the future value of the bond will be $100
Hence, the rate of return is 3.53% per year.
b)
To calculate: The future value of the bond
Introduction:
Rate of return refers to the gain or loss on the investment. It also refers to the increase or decrease in the capital value of an investment.
The future value of money refers to the amount of dollars that an investment grows over a definite period at a particular rate of interest rate. In other words, it refers to the future value of present cash investments.
b)
Answer to Problem 16QP
The value of the bond in 2024 will be $50.5.
Explanation of Solution
Given information:
Person X will purchase a bond worth $50 in 2014. He plans to hold it until 2024 or for 10 years. The rate of interest on the bond is 0.10 percent per year.
The formula to calculate the future value:
Where,
“FV” refers to the future value or the current market value
“PV” refers to the present value
“r” refers to the simple rate of interest
“t” refers to the number of years or periods of investment
Compute the future value:
Hence, the future value of investment after 10 years is $50.5.
c)
To calculate: The rate of return
Introduction:
Rate of return refers to the gain or loss on the investment. It also refers to the increase or decrease in the capital value of an investment.
The future value of money refers to the amount of dollars that an investment grows over a definite period at a particular rate of interest rate. In other words, it refers to the future value of present cash investments.
c)
Answer to Problem 16QP
The bond has to fetch a return of 7.18% per year to double its value in 2034.
Explanation of Solution
Given information:
Person X purchased a bond worth $50 in 2014. He plans to hold it until 2024 or for 10 years. The rate of interest on the bond is 0.10 percent per year. The future value of this bond in 2024 will be $50.50 (Refer to Part (b) of the solution). Instead of cashing the bond at $50.50, he plans to reinvest the
The formula to calculate the rate of return:
Where,
“P” refers to the principal amount invested
“r” refers to the simple rate of interest
“t” refers to the number of years or periods of investment
“FV” refers to the future value or the current market value
Compute the rate of return:
The present value of the bond is $50.50 in 2024. He plans to invest for 10 years until the value of the bond doubles in 2034. Hence, the future value of the bond will be $101
Hence, the bond has to fetch a return of 7.18% per year to double its value in 2034.
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Chapter 5 Solutions
Fundamentals of Corporate Finance
- 1. Briefly explain the following: a. You want to sell your bond that has a par value of ₱100,000 plus a 5 percent annual coupon rate thatwill mature after one year. The prevailing interest rate is 8%. Will you be able to sell your bond for ₱100,000 or higher? Briefly explain your answer.b. Is it possible for a country to have a twin deficit (a budget deficit and trade deficit) at the same time? How will this affect the economy? Briefly explain the benefits and dangers of a twin deficit.c. Which is better for the receiving country, FDI or FPI? Briefly explain your answer.arrow_forwardwhich one is correct answer please confirm? Q23: The real rate of interest is expected to be 3%, and the expected rate of inflation for next year is expected to be 5.5%. If the default risk premium is 1.1 percentage points, and the seniority risk premium is 0.4 percentage points, what is the required return on a 1-year U.S. Treasury security? a. 9.6% b. 10.0% c. 8.9% d. 8.5%arrow_forward5. Finding the interest rate and the number of years The future value and present value equations also help in finding the interest rate and the number of years that correspond to present and future value calculations. If a security currently worth $12,800 will be worth $16,843.93 seven years in the future, what is the implied interest rate the investor will earn on the security—assuming that no additional deposits or withdrawals are made? 7.60% 0.19% 4.00% 1.32% If an investment of $40,000 is earning an interest rate of 4.00%, compounded annually, then it will take for this investment to reach a value of $53,679.69—assuming that no additional deposits or withdrawals are made during this time. Which of the following statements is true—assuming that no additional deposits or withdrawals are made? It takes 14.21 years for $500 to double if invested at an annual rate of 5%. It takes 10.50 years for $500 to double if invested…arrow_forward
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