Imagine a country that is operating a fixed exchange rate relative to the dollar. The currency is trading at a forward discount of 50 percent, and rumors have been circulating that the government may pursue a large devaluation. Do you expect the devaluation will be equal to 50%, above 50%, or below 50%? Explain your answer.
Hummm. The only advice I can give you is that the forward discount rate tells you what the market thinks the devaluation will be.
My name is Ban and I am doing my MBA and I need help with my finance class (FIN4400) Below is the questions. PLEASE let me know if you can help. I need them by tomorrow 4pm (Friday 5, 2007 at 2:00pm. I know it is very short notice But i really need them. PLEASE let me know.
Time Value Problems
Show your inputs into each problem below. For Example:
N=
I=
PV=
PMT=
FV=
where the bold face represents a solved value.
(In problems 8-13 assume interest is 5% paid once per year, I=5)
FV/PV Lump Sum.
3-8. What is $100 invested today worth 5 years from now?
3-9. How much am I willing to pay today for the receipt of $100 five years from now?
FV/PV Ordinary Annuity (payment/receipt at end of period)
3-10. How much will my savings account be worth 5 years from now if I invest $100 at the end of each year?
3-11. How much am I will to pay today for the receipt of $100 at the end of each of five years?
FV/PV Annuity Due (payment/receipt at beginning of period)
3-12. How much am I willing to pay today for the receipt of $100 at the beginning of each of five years?
3-13. How much am I willing to pay today for the receipt of $100 at the beginning of each of five years?
3-14. True/False explain: Other things constant, present and future values of annuities due are always greater than the present and future values of ordinary annuities.
Solving for Time (N)
3-15. If you presently have $2,000 invested at a rate of 8 percent, how many years will it take for your investment to triple?
Solving for Interest (I)
3-16. You want your money to double in six years. What yield should you be looking for on your investment?
Loan Payments (PMT)
Note: Mortgages, like rent, are paid monthly unless otherwise specified.
3-17. To obtain any loan you have to be able to afford the payments. When judging your credit worthiness loan officers do not want to see more than 40% of your income each month going to pay-off debts (including a mortgage). You have $1,000 a month already dedicated to a vicious credit card company and a payment on a car loan. Your income is a hefty $4,000 per month. What is the maximum amount the bank will loan you if you would like a 30 year loan at 8 percent (payments are made monthly)?
3-18. A high-pressure real estate guy with a toupee wants you to buy a $200,000 home in Old Metairie. He does not know it yet, but you are soon to whip out your trusty financial calculator. Hmm… I want to put 3% down, I can get a 30-year loan for the balance at 6.75%, but will that exceed the $1,200 per month that I can afford to pay? If not, how much more would I have to put down to get the payments down to $1,200 per month?
3-19. The brother of that real estate guy sells cars. If you want a $22,000 car you can have 2.9% financing with 10% down or $4,000 cash towards the down payment with ordinary 7.4% financing and a minimum of 10% down. Assume that the loan is for 4 years. Which alternative yields the lowest monthly payment?
3-20. In the problem above, which type of financing will cost you less in the long term?
PV of uneven cash flows
3-21. UNO is considering the purchase a Yacht to keep the Chancellor from leaving his job here. He found a 60 foot boat that he likes. The purchasing department is trying to find the best loan arrangement. Consider the following payment schedule with a balloon payment at the end of the first year and at the end of the seventh year:
End of Year 1 $39,000
2 $19,500
3 $19,500
4 $19,500
5 $19,500
6 $19,500
7 $65,000
The loan states that the discount rate is 12 percent. UNO does not have any money now but it will in a year (i.e., zero down payment). Ignoring taxes and transactions costs, how much will this impressive party boat cost us?
Education and Retirement Savings plans
3-22. Your parents start saving for your sister's college education. She is 7 and will begin college when she turns age 18. She will be going to Tulane and will need $28,0000 when she begins college and that same amount at the beginning of the year for the following 3 years (four years total) They will make a deposit at the end of this year in an account which pays 8 percent compounded annually, and an identical deposit at the end of each year with the last deposit occurring when she turns age 18. What should the value of each deposit be if your parents are to put your sister through school? (answer to the nearest dollar)
3-23. Your father, who is 60 (his birthday is today), plans to retire in 2 years, and he expects to live independently for 3 years. Suppose your father wants to have real income of $55,000 in today's dollars each year after he retires. His retirement income will start the day he retires, 2 years from today, and he will receive a total of 3 retirement payments. Inflation is expected to be constant at 3 percent. Your father has $130,000 in savings now, and he can earn 7 percent on savings now and in the future. How much must he save each year, (last contribution occurs at the time he retires), to meet his retirement goals? (Answer to the nearest dollar)
Effective Interest
3-24. The APR on my credit card says 19.8%. How much are they really making on me each year on my outstanding balance?
3-25. Bank A is offering a great deal on unsecured loans. Bank A charges 12% compounded quarterly. You work for Bank B that compounds interest monthly. Your boss would like to know what the maximum nominal rate Bank B could charge and still remain competitive with Bank A?
Loan Amortization
3-26. Assume that your aunt sold her house on December 31 and that she took a mortgage in the amount of $50,000 as part of the payment. The mortgage has a stated (or nominal) rate of 8%, but it calls for payments every 6 months, beginning June 30th and the mortgage is amortized over 20 years. Now, one year later, your aunt must file schedule B of her tax return with the IRS informing them of the interest that was included in the two payments made during the year. (This interest will be income to your aunt and a deduction to the buyer of the house.) What is the total amount of interest that was paid during the first year?
3-27. What is the total amount of interest paid on a $100,000 mortgage loan for 30 years at 7%?
Refinancing
3-28. I just obtained a 25-year $100,000 mortgage with a 7.5% interest rate. Interest rates fell just after I got it. Therefore, I am considering refinancing the $100,000 balance with a 30 yr loan with a 5.5% interest rate. If I do refinance it will cost $3,000 but my payments will be lower. Is it worth it?
CALCULATOR ISSUES
P/Y You must make sure your P/Y (periods per year) is set to 1 before you start. To set press: 2nd => P/Y => 1 => ENTER => 2nd => QUIT. Now press 2nd => P/Y to make sure it is set.
Format Set decimal places to 4.
To set press 2nd => Format => 4 => ENTER => 2nd => QUIT.
CLR TVM You will be working with the five time value keys of your calculator. The values are retained even if you turn your calculator off. To clear these values press 2nd CLR TVM. Note DO NOT Reset your calculator because that will throw the P/Y and Format settings back to defaults.
INPUTS To input a value in any of the 5 keys press the value first then associate it with the key you want. Let’s say I want 5 years (i.e., N=5) then I press 5 and then press N.
% vs. Decimal Interest rate is always quoted as an Annualize percentage rate (APR). Your calculator accepts it as a percentage (i.e., 5% interest is entered in your calculator as I=5). You do not have to convert it into decimals. In some problems when payments are monthly, quarterly etc. put in the interest rate as a percentage then divide by the appropriate frequency then press I. For example for monthly payments on a 7% loan, I input 7, divide by 12, then press I for my interest rate. Your calculator retains the values past four decimal places shown so it is more accurate to do it this way.
PV negative In most cases it will be okay, but technically the PV key is always an outflow of cash, or an investment (also an outflow). Outflows are always negative. For example: To say PV=-100, input 100, => +/- key, => PV. When solving for time and interest rates, if you do not have a negative value here it will give you an Error5, which means there is no solution.
CPT Any one of the five keys may be solved given the values of the other four. To do this first input the values in the other four, press CPT and then the key you want to solve for.
did you find out the answers? im in mba now and i just got the same assignment.
pls lemme know
Also in gradauate school, and just got this assignment, any answers available?
To determine whether the devaluation will be equal to, above, or below 50%, we need to understand the concept of forward discount and its relationship with exchange rates.
In a fixed exchange rate regime, the government or central bank determines the exchange rate and aims to keep it constant relative to another currency, in this case, the US dollar. A forward discount refers to the situation where the currency is expected to weaken in the future compared to the current exchange rate.
When the currency is trading at a forward discount of 50 percent, it means that the expected future exchange rate is 50 percent lower than the current exchange rate. In other words, the market is anticipating a significant devaluation.
Considering the rumors circulating about a large devaluation, it is reasonable to assume that the devaluation will indeed be substantial. Therefore, it is likely that the devaluation will be above 50%. The exact percentage may depend on various factors, such as the severity of economic conditions, government policies, and market sentiments.
It is important to note that exchange rates and currency devaluations are influenced by numerous factors, including economic fundamentals, market forces, government policies, and investor expectations. Therefore, it is always crucial to look at the broader picture and take into account other relevant information to make a more accurate prediction.