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LONG-TERM WORKING CAPITAL CONSIDERATIONS: TIME VALUE OF MONEY AND BONDS (1-2 PAGES, PLUS CALCULATIONS IN EXCEL)

• Future Value:If the company deposits $2 million in a bank account that pays 6% interest annually, how much will be in the account after 5 years?
• Present Value:What is the present value of a security that will pay $29,000 in 20 years if securities of equal risk pay 5% annually?
• Required Interest Rates:The company owner has said she will retire in 19 years. She currently has $350,000 saved and thinks she will need $800,000 at retirement. What annual interest rate must she earn to reach that goal, assuming she does not save any additional funds?
• Future Value of an Annuity:Find the future values of these ordinary annuities. Compounding occurs once a year.
  • $500 per year for 8 years at 14%
  • $250 per year for 4 years at 7%
  • $700 per year for 4 years at 0%
• Present Value of an Annuity:Find the present values of these ordinary annuities. Discounting occurs once a year.
  • $600 per year for 12 years at 8%
  • $300 per year for 6 years at 4%
  • $500 per year for 6 years at 0%
• Bond Valuation:The company has two bonds in their investment portfolio, Bond C and Bond Z. Each bond matures in 4 years, has a face value of $1,000, and has a yield to maturity of 8.2%. Bond C pays an 11.5% annual coupon, while Bond Z is a zero-coupon bond. Assuming that the yield to maturity of each bond remains at 8.2% over the next 4 years, calculate the price of the bonds at each of the following years to
• maturity. Explain any observed differences from the pricing calculations of the two bonds.

Years to Maturity	Price of Bond C	Price of Bond Z
4
3
2
1
0

• Yield to Maturity and Yield to Call:The owner is interested in investing some retained earnings in corporate bonds. She is considering the following:
  • Bond A has a 7% annual coupon, matures in 12 years, and has a $1,000 face value.
  • Bond B has a 9% annual coupon, matures in 12 years, and has a $1,000 face value.
  • Bond C has an 11% annual coupon, matures in 12 years, and has a $1,000 face value.

Each bond has a yield to maturity of 9%.

a. Before calculating the prices of the bonds, identify whether each bond is trading at a premium, at a discount, or at par. b. Calculate the price of each of the three bonds. c. Calculate the current yield for each of the three bonds.

1: Future Value

calculates how much money will be in the account after 5 years.

2.Present Value

calculates the present value of a security that will pay $29,000 in 20 years if securities of equal risk pay 5% annually.

3: Required Interest Rates

calculates the annual interest rate the business owner must earn to reach that goal, assuming she does not save any additional funds

4: Future Value of an Annuity

calculates the future values of the provided ordinary annuities if compounding occurs once a year.

5:Present Value of an Annuity

calculates the present values of the provided ordinary annuities if discounting occurs once a year

6: Bond Valuation

calculates the price of the bonds at each of the years to maturity, including a thorough and detailed explanation of any observed differences from the pricing calculations of the two bonds.

7: Yield to Maturity and Yield to Call

identifies whether each bond is trading at a premium, at a discount, or at par, calculates the price of each of the three bonds, and calculates the current yield for each of the three bonds.

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