American University of Armenia Finance Problems Questions Find the attached document for the instructions. Ensure zero plagiarism and use good grammar Late submission will not be accepted Question 1
(a) What is the future value of $1200 invested for 3 years at an interest rate of 6% p.a., compounded
quarterly?
(b) What is the Effective Annual Rate in part (a)?
(c) What is the present value of an annuity consisting of payments of $265 every six months for 12
years, if the discount rate is 9% p.a., compounded semi‐ annually?
(d) You deposit $100 into a bank account for 9 years, at the end of which time the money has
grown to $183.85. What is the annual interest rate on the account?
(e) If the nominal rate of interest is 11% and the expected inflation rate is 8%, what is the
approximate real interest rate?
Question2
You have a choice between the following three investments:
A bank bill. The bill was issued as a 90‐ day bank bill 35 days ago. It has a face value of $1000
and is currently trading at a yield of 5.75% p.a.
A coupon bond issued by a AA‐ rated company. Fitch Ratings has estimated that the yield on debt
issued by AA companies in the current interest rate environment to be 6.6%. The bond has a face
value of $100,5 years to maturity and makes semi ‐ annual coupon payments at a coupon rate of
5.4% p.a.
An ordinary share. The share is expected to pay an annual dividend of $14 next year, $12 in year 2,
$10 in year 3, and then $9 every year thereafter in perpetuity. Your required rate of return on this
share is 10%.
(a) What is the value of the bank bill?
(b) What is the value of the bond?
(c) What is the value of the share?
*You can write answers on the paper and take photo of it or type them if possible
Essay questions
(write an answer)
1. The expected return on a portfolio is the weighted average of the expected return on each share
in the portfolio. Why is the risk of a portfolio less than the weighted average for the risk of each
share in the portfolio?
2. What are the advantages of company, compared to a sole trader or a partnership, as a form of
business organisation?
3. What are the advantages and disadvantages of the IRR method of project evaluation, compared
to NPV and the Payback Period methods?
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