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Question 2 Your firm is concerned about a financial obligation of $19 million coming due in...

Question 2 Your firm is concerned about a financial obligation of $19 million coming due in 6 years. If your firm could earn 6.5% APR on an investment, how much would your firm have to invest today to fund (finance) the future $19 million obligation? (In other words, what is the PV of $19 M due 6 years from now if the interest rate is 6.5%?) Assume annual compounding. Answer in units of millions of dollars and to 2 decimal points. (eg. $19.12 )

Question 3 What is the present value of a $1000 future amount received in 20 years if the appropriate discount rate is 10.7% APR? (FYI: This problem computes the value of a 20 year, $1000 zero coupon bond, although it is phrased in time value of money language, rather than bond language.) Answer to 2 decimal points.

Question 4 As interest rates increase, the PV of an expected future cash flow?

Does not change

Increases

Decreases

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Homework Answers

Answer #1

2. The present value is computed as shown below:

= Future value / (1 + r )n

= $ 19 million / 1.0656

= $ 13.02 million

3. The present value is computed as shown below:

= Future value / (1 + r )n

= $ 1,000 / 1.107020

= $ 130.93 Approximately

4. As interest rates increase, the PV of an expected future cash flow decreases since there is an inverse relation between the present value and the interest rate as depicted by the below formula:

Present value = Future value / (1 + r )n

Feel free to ask in case of any query relating to this question      

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