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Interest Rates and the Cost of Debt

Use of financial futures to hedge interest rate exposure.

The Treasurer for Pittsburgh Iron Works wishes to use financial futures to hedge her interest rate exposure. She will sell five treasury futures contracts at $107,000 per contract. It is July and the contracts must be closed out in December of this year. Long-term interest rates are currently 7.3 percent. If they increase to

Word Problem

Need to really see how the formula is calculated on this word problem. Compute earnings per share if earnings before interest and taxes are $10,000, $15,000 and $50,000 (assume a 30%tax rate). Explain the relationship between earnings per share and the level of EBIT. If the cost of debt went up to

Monthly payment calculation

Problem: On Dec 31, a house is purchased with the buyer taking out a 30-year $90,000 mortgage at 9% interest compounded monthly. The mortgage payments are made at the end of each month. Calculate the amount of the monthly payment. a. $724.16 b. $1356.37 c. $1365.69 d. $1355.91 e. None of the above


Problem: Bill needs $8000 to buy a new car in five years. How much should be deposited at the end of every quarter into an account that earns 8% interest compounded quarterly? a. $329.25 b. $345.97 c. $666.33 d. $ 489.25 e. None of the above

Valuation of firm

Introduction: Company X currently has no debt.The Market Value of its 15 million outstanding shares is 25 Euros.The newly hired Financial manager is convinced that this Zero Debt capital structure is not optimal; Debt financing increases the global market value of the company's securities by the present value of the corporate

Interest rate parity; Currency of invoice and currency of expenses

1) Assume that interest rate parity holds, and the euro's interest rate is 9% while the U.S. interest rate is 12%. Then the euro's interest rate increases to 11% while the U.S. interest rate remains the same. As a result of the increase in the interest rate on euros, the euro's forward _______ will _______ in order to maintain i

Translation exposure; interest rate parity

A perfect hedge (full coverage) on translation exposure can usually be achieved when: using the money market hedge. using the forward hedge. using the futures hedge. none of the above, since a perfect hedge is nearly impossible. Assume that the U.S. interest rate is 10%, while the British interest rate i

Yield and interest rates

Which of the following is most correct? a. The yield on a 2 year corporate bond will always exceed the yield on a 2 year treasury bond. b. The yield on a 3 year corporate bond will always exceed the yield on a 2 year corporate bond. c. The yield on a 3 year treasury bond will always exceed the year on a 2 year treasury bond

18-8. Inflation and Exchange Rates

18-8. Inflation and Exchange Rates. Suppose the current exchange rate for the Russian ruble is ruble 29.15. The expected exchange rate in three years is ruble 31.02. What is the difference in the annual inflation rates for the United States and Russia over this period? Assume that the anticipated rate is constant for both cou

Investment: discount rate; semiannual compounding; annual interest etc...

1. What is the present value of $800 received 5 years from today. Use a discount rate of 3% and semiannual compounding. Choose and place on the answer sheet the best answer from those provided below and attach your supporting work. 2. If you have $1000 today, invest it in an investment that pays 10% interest quarterly for 10

Multiple choice questions in financial management: estimated selling price of stock, monthly loan payment, financial statements, appropriate rate of interest to charge under the expectations theory, bond prices, inventory turn ratio, minimum required rate of return, stock's beta coefficient

1) For a share of stock, the projected selling price one year from now (P1) is $125.00, the projected dividend payment one year from now (Dl) is $4.25, and the investors' required rate of re tu m for the stock is 14%. The estimated selling price of this stock is: a. $109.65. b. $120.75. c. $113.38. d. none of the above

Compound interest

If $2500 is invested in a long-term trust fund with an interest rate of 5% compounded continuously, what is the amount of money in the account after 25 years?

Global Risk Management - Hedge Value & Arbitrage Opportunity Problem

Please work problems; formula and showing how to solve problem are most important (so I can see how to solve similar problems). Thanks American Airlines is trying to decide how to go about hedging â?¬70 million in ticket sales receivable in 180 days. Suppose it faces the following exchange and interest rates. Spot rate

Future Value/Present Value and Annuity Tables

1. You wish to retire in 18 years, at which time you want to have accumulated enough money to receive an annuity of $14,000 a year for 20 years of retirement. During the period before retirement , you can earn 11% annually and after retirement you can earn 8% annually. What annual contributions will allow you to receive $14,

Future Value / Present Value and Annuity Tables

1. John started a paper route 1/1/95. Every three months, he deposit $500.00 in his bank account. The account earns 4% annually but is compounded quarterly. On 12/31/98, he used the entire balance in his account to invest in a contract that pays 9% annually. How much will he have on 12/31/01? 2. Joe invests $50,000 in a pro

Sinking Fund

$6000 is borrowed at 10% compounded semi-annually. The amount is to be paid back in 5 years. If a sinking fund is established to repay the loans and interest in 5 years, and the fund earns 8% compounded quarterly, how much will have to be paid into the fund every 3 months?

Cost of debt (Borrowing capital); explain phases of debenture issuing cost

What is the Cost of Borrowing Capital? Explain the different phases of Debenture issuing cost for the folliwng examples? 1) A company wishes to issue 1000, 7% debentures of $100 each for which the company had to pay the following expenses: (i) under writing commission 1.5% (ii) Brokerage .50% (iii) Printing

Goal Seeking

Instruction: ** Review the attached document ** - Recreate the last spreadsheet shown in the attached document. - The formulas for the cells E10, E11, and E13 are shown in the last spreadsheet in the attached document. Note: - The PMT() function displays the Monthly Loan Payment amount as a negative value, not as a

Compounded Interest

1. Find the present value of $2000 to be received 2 years from now discounted at 3% semiannually. 2. How many years will it take to triple your money in an investment that pays 7% interest compounded quarterly? 3. What is the monthly payment on a $150,000, 30-year mortgage at a 6.5% interest rate? 4. If you borrow $200

Value of Bonds

XYZ Company is planning to issue some bonds. The bonds,with a $5000.00 par value and the coupon rate of 12%,will mature in 10 years. The interest will be paid semiannually. a) What would be the value of each bond when issued if the marlet interest rate is 12% b) Suppose two years later from the original issuing date, the g

Leverage is added.

Given the following information, leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 34% Personal tax rate on income from bonds: 50% Personal tax rate on income from stocks: 10% a. $-0.050 b. $-0.188 c. $0.188 d. $0.633 e. None of the above.

Interest rate

Assume that the 180-day interest rate is 1% and 3%, respectively in the U.S. and Japan. Also, the spot rate and 180-day forward rate are equivalent at 120 yen per one U.S. dollar ($.008333 per one Japanese yen). As a trader for a commercial bank with $1,000,000 to invest, could earn a risk-free return by engaging in covered inte


Responses from MBA and finance majors are preferred. Please include all your financial analysis and numerical results. Note that the actual case is only 8 pages. The remaining pages are supplementary information. Using the attached case study answer the following questions a. Should Marriott move forward with Project C

Interest rate is discussed.

The interest rate on 1-year Treasury securities is 5 percent. The interest rate on 2-year Treasury securities is 6 percent. The expectations theory is assumed to be correct. Which of the following statements is most correct? a.The maturity risk premium is positive. b.The market expects that 1-year rates will be 5.5 percen

Continuously Compounding Interest

I am in Pre-Calc and we are covering the number e and the function e^x. I do not understand how to compound continuously. Please explain how to do this. Here is my problem: Suppose you invest $1.00 at 6% annual interest. Calculate the amount that you would have after one year if the interest is compounded continuously.

Interest rate levels

Explain how a decrease in the general level of interest rates affects the valuation of a firm's bonds. To prove this statement solve and answer the following: I have $1,000 bind paying 12 percent interest that has 10 years to maturity. If the current interest rates are 10 percent, will a prudent investor pay me more than $1

Interest Rates

Due to a recession, the inflation rate expected for the coming year is only 3 perecent. However, the inflation rate in Year 2 and thereafter is expected to be constant t some level above 3%. Assume that the real risk-free rate is k*= 2% for all maturities and that the expectations theory explains the yield curve,so there are n

Expected Rate of Interest and inflation

Suppose the annual yield on a 2-year Treasury bond is 4.5%, while that on a 1-year bond is 3%. k* (=real risk-free rate of interest) is 1 percent, and the maturity risk premium is zero. a. Using the expectations theory, forecast the interest rate on a 1-year bond during the second year. (Hint: Under the expectations theory, t