Basics of Corporate Finance

1. ABC Bank receives a loan payment of $1,000 principal and interest from a customer. The bank loans the $1,000 to another customer for one year at the rate of 6.25% per annum. The second customer will pay $1,062.50 to the bank. This amount represents the:
c) future value of the loan payment received from the first customer calculated on a simple interest basis.

2. In the future value formula FVT = P (1 + R/M)T x M ; if:
a) M equals two, interest is compounded semi-annually for each year in the period.

3. In the formula FVT = P x eRT, eRT represents:
b) the future value interest factor for an infinitely large number of compounding periods.

PROGRESS CHECK

4. If you borrow $150,000 for five years at an 11.5% annual rate, compounded monthly, payable at the end of the loan, how much will you have to pay at the end of five years?
$____________________

5. To calculate the present value of a bond portfolio, we apply a discount rate that represents the (select two):
_____ a) rate of return on the next best alternative investment.
_____ b) reciprocal value of an interest rate on a comparable investment.
_____ c) investor's required rate of return.
_____ d) investor's return on the bond portfolio.
_____ e) risk factor associated with the bond portfolio.

6. XYZ Company is issuing zero-coupon bonds to fund its expansion plans. The bonds have a face value of $100,000 and a maturity of five years. How much would an investor requiring a 10% return be willing to pay today for one of these bonds?
$_____________________