Time Value of Money, Financial Information, and Financial Calculations

Time Value of Money, Financial Information, and Financial Calculations


Part One: Time Value of Money

You just won the lottery!  The lottery claims that your prize is $1,500,000 after taxes.  You have the choice to receive the lump sum amount one year from today in the amount of $1,500,000, OR, you can receive payments of $170,000 per year for the next 10 years, beginning one year from today. If your required rate of return is 8%, which option would be preferred?

Required:

Ignoring taxes and based on the TVM alone, evaluate the two options.  Use a Microsoft Excel spreadsheet to calculate the lump sum payment you would receive one year from today. Calculate the total payments you would receive over the next 10 years. Which option is preferred? Justify your response.
Part Two: Financial Information

Bob and Sally just purchased Bosall Industries and have asked for your help in the financial area.  They have several questions about the financial information provided from the previous owners, as summarized below.

Sally has discovered several types of bonds on the books of Bosall.  They have asked you describe each type of bond, how they are traded, and where they are traded.  They would also like to know the advantages and disadvantages of each type of bond to the seller and to the buyer.  The types of bonds in question are:

Junk Bonds
Zero Coupon Bonds
Junk Bonds
Convertible Bonds
Municipal Bonds
Sally is also curious about some terminology she saw in her readings.  Specifically, she would like you to explain the meaning of the following:

Interest rate risk
Reinvestment rate risk
Current Yield
Indenture
Part Three: Financial Calculations

Bob is concerned with the current value and the yields of several bonds the company is holding as investments.  He has asked you the following questions regarding these holdings:

A Carbost Inc. 10 year bond was purchased 2 years ago at par, for $1,000, and has a coupon rate of 7.5%.  The yield to maturity on this bond is 10%.  Bob would like to know the current price or value of this bond.


A 20-year bond that the company purchased 5 years ago at a par value of $1,000 may be called in one year at $1,050. The bond currently sells for $1,100 and has a coupon rate of 6%.  Bob would like to know the following:


What is the bond’s yield to maturity?
What is the bond’s yield to call?
Deliverables:

Submit your answers to the questions in Parts One,Two, and Three using an MS Excel spreadsheet. Use good form, and show all your calculations and conclusions.



Assignment 2 Grading Criteria
Maximum Points
Correctly calculated the options using TVM, identified the preferred option, and justified the answer.
15
Correctly described the different types of bonds, and how they are traded.
5
Identified where and how each type of bond is traded, as well as the advantages and disadvantages of each.
5
Correctly explained the different terms and concepts used in financial reports.
5
Correctly determined the current price or value of the Carbost Inc. bond and showed all calculations.
5
Correctly identified the 20-year bond's YTM and showed all calculations.
5
Correctly identified the 2-year bond's YTC and showed all calculations.
5
Wrote in a clear and concise manner following APA standards, and demonstrated ethical scholarship in accurate representation of sources
5
Total:
50


This needs to have in-text citations as needed for explanations and references for the in-text citations in APA format and needs to be plagiarism free.