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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