amount of funds

interest
supplied/demand
rate by
interest
fundsrate
suppliers
by
intfunds
rate bydemanders
funds demanders
1 2% 7% 9%
5 3% 6% 8%
10 4% 4% 7%
A,C 20 6% 3% 6%
50 7% 2% 4%
100 9% 1% 3%

Chart Title
10%
8%
6%
4%
2%
0%
0 40 80 120

interest rate by
funds suppliers

interest rate by
funds demanders
int rate by funds
demanders

B
The real rate of interest creates an equilibrium between the supply of savings and the deman
which is shown on the graph as the intersection of lines for current suppliers and current dem
0
= 4%

D
A change in the tax law causes an upward shift in the demand curve, causing the equilibri
supply curve and the demand curve (the real rate of interest) to rise from
o
= 4% to k
0
= 6% (intersection of lines for current suppliers and demanders after new

A
100RS.
25 each
total 4 shirts
 B 100+(100*0.09)=109$

C 25+(25*0.05)=$26.25

D
The number of polo shirts in one year = $109
÷
$26.25 = 4.1524. He can buy 3.8% more shirts (4.1524
÷
4 = .0381)

E REAL rate of return = r-rf

9%-5% is equals to 4%

treasury security
time to maturity
yield
A 1 year 12.60%
B 10 years 11.20%
C 6 months 13.00%
D 20 years 11.00%
E 5 years 11.40%

A Chart Title
0.14

0.12

0.1

0.08

0.06

0.04

0.02

0
01234567

YIELD CURVE IS DOWNWARD SLOPING. LOWER FUTURE EXPECTING RATES OF INTRESTS.

 NOMINAL INTEREST RATES.
FOR TREASURY ISSUE rp=0
PERIOD K* IP rf=k*+IP
A 3 MONTHS 2.50% 5% 7.50%
2 yrs 2.50% 6% 8.50%
5yrs 2.50% 8% 10.50%
10 yrs 2.50% 8.50% 11.00%
20yrs 2.50% 9% 11.50%

B if k* drops to 2%, nominal intrest rate increase by 0.5%

C The yield curve for U.S. Treasury issues is upward sloping, reflecting the prevailing expectatio

D UPWARD sloping of curve is due to desire by lender to lend short term and desire by business

E UPWARD SLOPE IS DUE TO fact under current market conditions.

nominal and real rates

SECURITY K IP k*=k-IP
A 12.60% 9.50% 3.10%
B 11.20% 8.20% 3.00%
C 13% 10% 3.00%
D 11% 8.10% 2.90%
E 11.40% 8.30% 3.10%

B REAL RATE OF INTEREST DECREASE. FROM JANUARY TO MARCH. AND STABLE FROM MA
real intrest rate include economic conditions like gov budget deficit etc. or changes in tax leg

C
 D

YIELD CURVE IS DOWNWARD SLOPING REFELCT LOWER EXPECTED FUTURE RATES OF INTEREST.

B,C

5 years ago, yeild curve is flat reflect stable inflation. 2 years ago curve is downward sloping refl

RISK FREE RATE AND RISK PREMIUM

A security k* ip rf
A 3% 6% 9%
B 3% 9% 12%
C 3% 8% 11%
D 3% 5% 8%
E 3% 11% 14%

B Since the expected inflation rates differ, it is probable that the maturity of each security differ
C NOMINAL INTEREST RATE

SECURITY k* ip rp k=rp+ip+k*
A 3% 6% 3% 12%
B 3% 9% 2% 14%
C 3% 8% 2% 13%
D 3% 5% 4% 12%
E 3% 11% 1% 15%

RISK PREMIUM

SECURITY K* IP RF=K*+IP
A 2% 9% 11%
B 2% 7% 9%

B RISK PREMIUM

SECURITY DEFAULT RISK

INTREST RATE
LIQUIDITY
RISK RISK
OTHER RISKSRP=ALL RISK
A 1% 0.50% 1% 0.50% 3.00%
B 2% 1.50% 1% 1.50% 6.00%

C SECURITY RP RF K=RF+RP
A 3% 11% 14%
B 6% 9% 15%

SECURITY A has a higher risk free rate of return than B due to higher near term inflation rates
security A is less risky

bonds interest payments before and after tax

A YEARLY intrest =1000*0.07=$70.00

B TOTAL intrest expense =$70.00per bond * 2,500 bonds= $175,000

C total before tax intrest= 175000$

intrest expense tax savings=0.35*$175000 =61,250
net after tax intrest expense =$ 113,750
 A TUESDAY,NOVEMBER 7
B 1.0025*1000=$1002.50
C 2005d
D 558
E 8.75%
F current yield = $87.50÷ $1,002.50 = 8.73% or 8.7% per the quotE
G PRICE DECLINE BY 5/8% of par value.

valuation fundamentals

year cash flows required return

vo=CF/(1+K)^1+CF/(1+k)^2……
1 1,200 6% 1132.07547
2 1,200 6% 1067.99573
3 1,200 6% 1007.54314
4 1,200 6% 950.512396
5 6,200 6% 4633.00067
total 8791.12741

The maximum price you should be willing to pay for the car is $8,789, since if you paid more than that am

asset end of year amount i PVIFA=pmt*(1/i)(1-(1/(1+i)^n)

A 1 5000 18% 4237.28814
2 5000 18% 7828.21028
3 5000 18% 10871.3646

B 1 TO INFINITY 300 15%

C 1 0 16% 0
2 0 16% 0
3 0 16% 0
4 0 16% 0
5 35000 16% 114600.278

D 1 1500 12% 1339.28571

2 1500 12% 2535.07653
3 1500 12% 3602.7469
4 1500 12% 4556.02402
5 1500 12% 5407.1643
6 8500 12% 34946.9622

E 1 2000 14% 1754.38596

2 3000 14% 4939.98153
 3 5000 14% 11608.1601
4 7000 14% 20395.9861
5 4000 14% 13732.3239
6 1000 14% 3888.66752

CASH FLOW YEAR LOW=10% AVG=15% HIGH RISK=22%

3000 1 10% 15% 22%
3000 2 10% 15% 22%
3000 3 10% 15% 22%
3000 4 10% 15% 22%
15000 5 10% 15% 22%

PVA=pmt*(1/i)(1-(1/(1+i)^n)
9509.59634 8564.93509 7480.92153
pv=fv/(1+i)^n9313.81985 7457.65103 5549.98879

total 18823.4162 16022.5861 13030.9103

BOND VALUATION:=
I i n Mo pvifa=(1-1/(1+r)^n)/i
pvif=fv/(1+r)^n
A 100 10% 16 1000 7.82370864 21.7629136
B 120 20% 16 1000 4.72956054 6.49054715

FOR A Since Complex Systems' bonds were issued, there may have been a shift in the supply-deman

FOR B IF rrr is < than CR , the bond will sell at premium

Bond Valuation–Annual Interest

rd n M PVIFA=(1-1/(1+r)^n)/i
pvifa
140 12% 20 1000 7.46944362 14.5133471
80 8% 16 1000 8.85136916 23.3512374
10 13% 8 100 4.79877029 3.76159862
80 18% 13 500 4.90951259 9.30301866
120 10% 10 1000 6.14456711 46.2651947
 Bond Value and Changing Required Returns
A
BONDS rd I n M pvifa=(1-1/(1+r)^n)/i
PVIF
1 11% 110 12 1000 6.49235615 31.4424906
2 15% 110 12 1000 5.420619 20.5597865
3 8% 110 12 1000 7.53607802 43.6825135

WHEN RRR is less than CR ,then market value is greater than par value.and bond sells at premium. But when RRR is less than CR th

ECONOMIC conditions have changed, causing a shift in the basic cost of long-term funds, or (2) the firm's risk has change

YIELD TO MATURITY:=

Bond A is selling at a discount to par

Bond B is selling at par value.

Bond C is selling at a premium to par.

Bond D is selling at a discount to par

 Bond E is selling at a premium to par.

Yield to Maturity

Using a financial calculator the YTM is 12.685%. The correctness of this number is proven by putting the YTM in the bond valuatio

rd n I M PVIFA=(1-1/(1+r)^n)/i
PVIF
12.69% 15 120 1000 6.56895599 20.0073519

B The market value of the bond approaches its par value as the time to maturity
declines. The yield to maturity approaches the coupon interest rate as the
time to maturity declines.

Bond Valuation and Yield to Maturity

A bond A I*PVIFA+M*PVIF
60*3.605+1000*0.567
783.3
BOND B 140*3.605+1000*0.567
1071.7

B NO.OF BONDS 25.533 OF BOND A (20000/783.33)

NO. OF BONDS 18.622 OF BOND B (20000/1071.7)

C Interest income of A = 25.533 bonds x $60 = $1,531.98

Interest income of B = 18.66194 bonds x $140 = $2,612.67

D At the end of the 5 years both bonds mature and will sell for par of $1,000

FVA= 60*FVIFA+1000
60(6.105) + $1,000
1366.3
 FVA= 140(FVIFA10%,5) + $1,000

140(6.105) + $1,000
1854.7

for both bonds the principal is priced to yield the YTM of 12%. However, bond B is more dependent upon the reinvestment of the la

24 Bond Valuation–Semiannual Interest

BONDS rd I n M pvifa=(1-1/(1+r)^n)/i
25 B0 7% 50 12 1000 7.9426863

26

BONDS

A 10% 50 12 1000 6.81369182

B 12% 60 20 1000 7.46944362
C 12% 30 5 500 3.6047762
D 14% 70 10 1000 5.21611565
E 6% 3 4 100 3.46510561

BO 3% 125 40 5000 23.114772

ds demanders

of savings and the demand for funds,

suppliers and current demanders. K

urve, causing the equilibrium point between the

ate of interest) to rise from k

and demanders after new law)

ne year = $109

more shirts (4.1524

= r-rf
4%
e is downward sloping reflect low expected future rates. Today yeild curve is upward sloping reflect higher expected rates of intres
.7% per the quotE
alue.

u paid more than that amount, you would be receiving less than your required 6% return

/i)(1-(1/(1+i)^n)
Bo=I*pvifa+M*pvif
22545.2844
7058.09442

Bo=I*pvifa+M*pvif
15559.0692
24059.3469
424.147565
5044.27034
47002.5428
Bo=I*pvifa+M*pvif
32156.6498
21156.0546
44511.482
Bo=I*pvifa+M*pvif
20795.6266
the reinvestment of the large coupon payment at the YTM to earn the 12% than is the lower coupon payment of A.

PVIF Bo=I*pvifa+M*pvif
22.200598 22597.7323

15.9315409 16272.2255
6.2200059 6668.17252
17.0228057 8619.54612
18.8820667 19247.1948
2.37628099 248.023416

38.3196051 194487.372