Question

Answer the following questions as detailed as possible:

Question #1 – Time Value of Money

Please give a detailed example from your own personal or professional experiences (life/career) that involves the Time Value of Money.

The Time Value of Money defined as in Chapter 4 as: Present Value, Future Value, Present Value of an Annuity, Future Value of an Annuity, Amortization. It can be one of these above or multiple.

Explain the example and how this/these money valuation tools fit into your example. Please be thorough and specific.

Question #2 – Debt Valuation

Part I – How are corporate bond ratings determined? Why is there so much variation in the coupon rates and prices of various bonds?

Part II - Finally, why do some bonds sell for less that their face value, while others sells at a premium?

Question #3 – Stock Valuation & Risk

DOW DROPOUT - General Electric will drop out of the Dow industrials next week, a milestone in the decline of a company that once ranked among the mightiest of blue chips and was a pillar of the U.S. economy. It will be replaced by drugstore retailer Walgreens Boots Alliance, the latest sign of the rise of the global consumer economy and the post crisis boom in debt issuance that has fueled a global deal-making frenzy.

The decision to drop GE, an original member of the Dow that has been a part of the 30-stock index continuously since 1907, marks the latest setback for a conglomerate that once was the most valuable U.S. company, but has been hit hard in recent years by the unraveling of its finance business and competitive problems. GE shares have tumbled 55% over the past 52 weeks, erasing more than $100 billion in wealth.

As an investor in General Electric, please give examples what the above means in relation to an investment? Let’s say you purchased 100 shares of General Electric common stock on January 1, 2002.

Question #4 – Risk Evaluation

Select a company from the Dow Jones Industrials Index and prepare a risk analysis.

You risk analysis should include minimally below:

Credit rating

Beta value

CAPM required return on equity investment

CAPM rates to use:

Risk Free Interest Rate = 2.85%

Market Risk Return = 8.25%

Answer 1

(1) A real-life example of the time value of money would involve determining the annual repayments of a mortgage, wherein the applicable mortgage interest rate would function as the discounting rate. The underlying idea behind mortgage repayment calculation is that the summed present value of the annual repayments should be equal to the mortgage amount. This conforms to the time value of money principle as the mortgage lender bears the opportunity cost of lending the borrower money with the mortgage interest rate being the lender's opportunity cost. Therefore, the discounted value of all repayments should sum up to be equal to the original mortgage value.

NOTE: Please raise separate queries for solutions to the remaining unrelated sub-parts.