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Time Value of Money: Comparing Interest Rates Different compounding periods, are used for different types of investments. In order to properly compare investments or loans with different compounding periods, we need to put them on a common basis. In order to do this, you need to understand the difference between the nominal interest rate (INOM) and the effective annual rate (EAR). The interest rate is quoted by borrowers and lenders, and it is also called the annual percentage rate (APR). If the compounding periods for different securities is the same, then you use the APR for comparison. If the securities have different compounding periods, then the must be used for comparison. Here, M is the number of compounding periods per year and INOM/M is equal to the periodic rate (IPER). If a loan or investment uses compounding, then the nominal annual rate is also its effective annual rate. However, if compounding occurs more than once a year, EAR is INOM. Quantitative Problem: Bank 1 lends funds at a nominal rate of 7% with payments to be made semiannually. Bank 2 requires payments to be made quarterly. If Bank 2 would like to charge the same effective annual rate as Bank 1, what nominal annual rate will they charge their customers? Round your answer to three decimal places. Do not round intermediate calculations. %
You bought a share of 5.80 percent preferred stock for $93.68 last year. The market price for your stock is now $96.42. What is your total return for last year?
Suppose that a firm's common equity is selling for $150 in the market, that the firm has $115 million in Net Income, and the firm has 20 million common shares outstanding. Finally, the firm faces a moderately high cost of common equity of 14%. What i..
If the standard deviation of a stock's returns over the last 12 quarters is 4 percent, and if there is no perceived change in volatility, there is a ____ percent probability that the stock's returns will be within ____ percentage points of the expect..
All Capital has an employment contract with its newly hired CFO which requires a lump sum payment of $2.5 million to be paid to the CFO upon the successful completion of his first three years of service. Alliance wants to set aside an equal amount of..
Which of the following is generally true about a firm's cost of debt?
Currently interest rates continue to be close to historic lows, resulting in low borrowing costs for consumers. Savers, on the other hand, continue to struggle in this low interest rate environment. Currently a 6 month certificate of deposit pays abo..
How can one possibly achieve an acceptable mark for this paper without full and complete applied understanding of today's two prevailing merger valuation methodologies, upon which informed determination of deal success or failure relies?
David Salter has a PAP with coverage of $25,000/$50,000 for bodily injury liability, $25,000 for property damage liability, $5,000 for medical payments and a $500 deductible for collision insurance. How much will his insurance cover in the following ..
Stock R has a beta of 2.4, Stock S has a beta of 0.65, the expected rate of return on an average stock is 13%, and the risk-free rate is 6%. By how much does the required return on the riskier stock exceed the required return on the riskier stock exc..
What additional services or products would you suggest that the bank market to each of these customers? Discuss how the source of profitability will influence the choice of services and products that you recommend.
Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown below. The required rate of return on projects of both of their risk class is 10 percent. Project A s Cash flow from year 0 to year 3: -1000, 400, 40..
Suppose an individual investor starts with a portfolio that consists of one randomly selected stock. What will happen to the portfolio’s risk if more and more randomly selected stocks are added? Explain the differences between stand-alone risk, diver..
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