FIN534
Class Web Page, Spring '21
Jacksonville
University
Instructor:
Maggie Foley
Term Project (due by the end of
week 6)
Business Finance Online, an
interactive learning tool for the Corporate Finance Student http://www.zenwealth.com/BusinessFinanceOnline/index.htm
Weekly SCHEDULE,
LINKS, FILES and Questions
Week 
Coverage, HW, Supplements 
Required 

Miscellaneous 

Weekly live session 69 pm on
Thursday https://us.bbcollab.com/guest/7f0ee4db0ef04b87b3a1365e5234a4ca Weekly Q&A Saturday 78 pm https://us.bbcollab.com/guest/30cc6021cf99484795b0cf734bbd56ac Week
1– 3/18:
DCOB #159 or take it online  chapters 2, 3: class video url (https://www.jufinance.com/video/fin534_week1_2021_spring.mp4)  set up marketwatch.com game and start trading stocks like a pro. Week
2– 3/25:
DCOB #159 or take it online  chapters 1, 4, 5: class video url (https://www.jufinance.com/video/fin534_week2_2021_spring.mp4)  first discussion board due on 3/28 at 11:59 pm. Topic: Your stock trading game so far Week
3 – 4/1: DCOB #159 or take it online  chapter 6: class video url (https://www.jufinance.com/video/fin534_week3_2021_spring.mp4)  second discussion board due on 4/6 at 11:59 pm. Topic: Your opinion about negative interest rate Week
4 – 4/8: DCOB #159 or take it online  midterm for chapters 1, 4, 5, 6  midterm review: https://www.jufinance.com/video/fin534_week4_2021_spring.mp4 
Homework of chapter 4 (problem solving) due: Chapter
4 End of Chapter Problems (not questions): 1, 2, 3, 4, 16, 17, 19, 27 Amortization and loan Exercise Homework of chapters 1,5,6 (problem
solving)  None  case studies of weeks 13 due: 1. Case 1 (updated 3/20/2021) (help video: https://www.jufinance.com/video/fin534_case1_2021_spring.mp4) – posted 2. Case 2 part 1 (help video: https://www.jufinance.com/video/fin534_case2_2021_spring_part_1.mp4)  Posted 3. Case 2 part 2 (help video: https://www.jufinance.com/video/fin534_case2_2021_spring_part_2.mp4)  Posted 4. Case 3 (help video: https://www.jufinance.com/video/fin534_case3_2021_spring.mp4)  Posted  third discussion board due on 4/11 at 11:59 pm. Topic: Your opinion about bilateral vs. multilateral trade systems Week
5 – 4/15: DCOB #159 or take it online  chapters 7,9: class video url (https://www.jufinance.com/video/fin534_week5_2021_spring.mp4)  fourth discussion board due on 4/18 at 11:59 pm. Topic: Your stock trading game so far Week
6 – 4/22 : DCOB #159 or take it online  chapters 10, 11 (partI): 1. class video – Part I url (https://www.jufinance.com/video/fin534_week6_spring_2021_p1.mp4) 2. class video – Part II url (https://www.jufinance.com/video/fin534_week6_spring_2021_p2.mp4) 
term project due on 4/25
at 11:59 pm  fifth discussion board due on 4/25 at 11:59 pm. Topic: Your opinion about bitcoin frenzy Week
7 – 4/29: DCOB #159 or
take it online  chapters 11 (part II), 14 : class video url (https://www.jufinance.com/video/fin534_week_7_2021_spring.mp4)  sixth discussion board due on 5/2 at 11:59 pm. Topic: Your stock trading game so far
Week 7 ½: DCOB #159 or take it online  no discussion board assignment this week 
Final exam 5/6/2021
– 5/9/2021 on blackboard 
Homework of
chapters 7, 9, 10, 11 (problem solving) – None 
Homework of
chapters 14 (problem solving) – Problems
on P602: 145, 147 (see chapter 14 class material on this web page)  case studies of weeks 57 due: Case 4; Case 5; Case 6 1. Case 4 – chapter 7 (help video: https://www.jufinance.com/video/fin534_case_4_2021_spring.mp4)  Posted 2. Case 5 – chapter 9 (help video: https://www.jufinance.com/video/fin534_case_5_2021_spring.mp4)  Posted 3. Case 6 – chapter 10 (help video: https://www.jufinance.com/video/fin534_case_6_2021_spring.mp4)  Posted 4. Case 7 – chapter 11 (help video: https://www.jufinance.com/video/fin534_case_7_2021_spring.mp4) – on 4/29 Notes about live sessions: I am holding eight in class live sessions. Each
live session will start at 6 pm on Thursday. Students are encouraged to attend
the class on campus in DCOB #159. If students cannot come, they could watch the video for what
they miss. 

Term Project General Requirements
·
Word document of
about 10 pages (including
cover page and appendix), Times New Roman font size 12 for the main body ·
Sample firms’ financial statements should be attached as an appendix to
the report ·
Tables or graphs
for ratio analysis should be inserted in appropriate sections ·
Instructions 1.
Preparation: Read Chapters 2 and 3 and the corresponding PPTs for Chapters
2 and 3 and the corresponding sections in the textbook. 2.
Pick the firms: Select a common theme (industry) for your project and
choose three companies in that industry. Describe briefly the industry and
company profiles, and analyze the firms’ competitive
positions in that industry. 3.
Collect data: Download the financial statements (balance sheet and
income statement) of those companies for the last three years from the same
source to ensure data consistency (e.g. Zacks
Investment Research). Describe the data briefly in your report. 4.
Perform ratio analysis: Calculate the various financial ratios discussed in
Chapter 3, including liquidity ratios, asset management ratios, debt
management ratios, profitability ratios, and market value ratios; also use
the DuPont equation to calculate ROEs. Present the results in an organized
way in your report. (All ratios in Table 31 on p. 119 should be included in
your report; other ratios mentioned in the textbook are optional.) 5.
Analyze the results: Conduct trend analysis (timeseries) and comparative
analysis (crosssection) for the various ratios to interpret the results and
identify potential problems for sample firms. (Common size analysis and
percentage change analysis are not required.) 6.
Recommend changes: Propose possible changes to address the identified
problems to achieve competitive advantages. 7.
Term
project sample study FYI only 

Week1 
Marketwatch Stock Trading Game (Pass code: havefun) 1. URL for your game: 2. Password for this private game: havefun. 3. Click on the 'Join Now' button to get
started. 4. If you are an existing MarketWatch member, login. If you are a new user, follow the link for a
Free account  it's easy! 5. Follow the instructions and start trading! Chapter 2 Financial
Statements Topics in Chapter 2: ·
Introduction
of Financial Statement ·
Firm’s
Intrinsic Value ·
Balance
Sheet ·
Income
Statement



Amount 

Sales 
$785 

Total cost of goods sold 
$460 

Gross profit
(EBITDA) 
$325 

Depreciation 
$210 

Operating expenses 
$0 

Operating income
(EBIT) 
$115 

Interest expenses 
$35 

Taxable income (EBT) 
$80 

Taxes on income 
$28 

Net income 
$52 
• What is the cash flow from investment for 2015? ($57)
• What is the cash flow from operating for 2015? ($360)
• What is the cash flow from financing for 2015? ($412)
Answer:
https://www.jufinance.com/10k/cf/
Cash Flow Statement
Template 

Cash at the
beginning of the year 
70 
Cash from operation 

net income 
52 
plus depreciation 
210 
/+ AR

61 
/+ Inventory 
22 
+/ AP 
15 
net change in cash from operation 
360 
Cash from investment 

/+ (NFA+depreciation) 
57 
net change in cash from investment 
57 
Cash from finaning 

+/ long term debt 
70 
+/ common stock 
465 
 dividend 
17 
net change in cash from investment 
412 
Total net change of cash 
5 
Cash at the end of the year 
75 
Chapter 3 Analysis
of Financial Statements
Topics in Chapter 3:
1.
Ratio
analysis
2.
DuPont
equation
3.
Benchmarking
for ratio analysis
4.
Limitations
of ratio analysis
5.
Qualitative
factors
Ratio Analysis template
http://www.jufinance.com/ratio
Finviz.com/screener
for ratio analysis (https://finviz.com/screener.ashx
Financial ratio analysis (VIDEO)
****** DuPont Identity
*************
ROE = (net income /
sales) * (sales / assets) * (assets / shareholders' equity)
This equation for ROE
breaks it into three widely used and studied components:
ROE = (net profit
margin) * (asset turnover) * (equity multiplie)
In class exercise
Firm AAA’s total asset = $720,000. This company has no debt, so its debt/equity ratio = 0%. Now the CEO wants to raise the debt/assets ratio to 40%. How much must the firm borrow to achieve this goal?
a. $273,600
b. $288,000
c. $302,400
d. $327,100
answer: Total assets $720,000
Target debt ratio 40%
Debt to achieve target ratio = Amount borrowed = Target % × Assets = $288,000
Week 1
case study (updated 3/20/2021) – chapters 2 and 3 (due with
the midterm exam)
Help video url: https://www.jufinance.com/video/fin534_case1_2021_spring.mp4  posted
In
discounted cash flow (DCF) valuation techniques the value of the stock is
estimated based upon present value of some measure of cash flow. Free cash
flow to the firm (FCFF) is generally described as cash flows after direct
costs and before any payments to capital suppliers.
Amazon.com
Inc., free cash flow to the firm (FCFF) forecast
Year 
Value 
FCFF_{t} or Terminal value (TV_{t}) 
Calculation 
Present
value at 16.17% 
0^{1} 
FCFF_{0} 
(4,286) 

1 
FCFF_{1} 
– 
= (4,286) ×
(1 + 0.00%) 
– 
2 
FCFF_{2} 
– 
= – ×
(1 + 0.00%) 
– 
3 
FCFF_{3} 
– 
= – ×
(1 + 0.00%) 
– 
4 
FCFF_{4} 
– 
= – ×
(1 + 0.00%) 
– 
5 
FCFF_{5} 
– 
= – ×
(1 + 0.00%) 
– 
5 
Terminal value (TV_{5}) 
– 
= – ×
(1 + 0.00%) ÷ (16.17%
– 0.00%) 
– 
Intrinsic value of Amazon.com's capital 
– 

Less: Debt (fair value) 
45,696 

Intrinsic value of Amazon.com's common stock 
– 

Intrinsic value of Amazon.com's common stock (per share) 
$– 

Current share price 
$1,642.81 
^{1}
Amazon.com
Inc., cost of capital
Value^{1} 
Weight 
Required
rate of return^{2} 
Calculation 

Equity (fair value) 
803,283 
0.95 
16.97% 

Debt (fair value) 
45,696 
0.05 
2.10% 
= 2.99%
× (1 – 29.84%) 
^{1} USD $ in millions
^{ } Equity (fair value) = No. shares
of common stock outstanding × Current share price
= 488,968,628 × $1,642.81 =
$803,282,551,764.68
^{ } Debt (fair value). See Details »
^{2} Required rate of return on equity
is estimated by using CAPM. See Details »
^{ } Required rate of return on
debt. See Details »
^{ } Required rate of return on debt
is after tax.
^{ } Estimated (average) effective
income tax rate
= (20.20% + 36.61%
+ 60.59% + 0.00%
+ 31.80%) ÷ 5 = 29.84%
WACC
= 16.17%
Amazon.com
Inc., PRAT model
Average 
Dec
31, 2017 
Dec
31, 2016 
Dec
31, 2015 
Dec
31, 2014 
Dec
31, 2013 

Selected
Financial Data (USD $ in millions) 

Interest expense 
848 
484 
459 
210 
141 

Net income (loss) 
3,033 
2,371 
596 
(241) 
274 

Effective income tax rate
(EITR)^{1} 
20.20% 
36.61% 
60.59% 
0.00% 
31.80% 

Interest expense, after tax^{2} 
677 
307 
181 
210 
96 

Interest expense (after tax)
and dividends 
677 
307 
181 
210 
96 

EBIT(1 – EITR)^{3} 
3,710 
2,678 
777 
(31) 
370 

Current portion of longterm
debt 
100 
1,056 
238 
1,520 
753 

Current portion of capital
lease obligation 
5,839 
3,997 
3,027 
2,013 
955 

Current portion of finance
lease obligations 
282 
144 
99 
67 
28 

Longterm debt, excluding
current portion 
24,743 
7,694 
8,235 
8,265 
3,191 

Longterm capital lease
obligations, excluding current portion 
8,438 
5,080 
4,212 
3,026 
1,435 

Longterm finance lease
obligations, excluding current portion 
4,745 
2,439 
1,736 
1,198 
555 

Total stockholders' equity 
27,709 
19,285 
13,384 
10,741 
9,746 

Total capital 
71,856 
39,695 
30,931 
26,830 
16,663 

Ratios 

Retention rate (RR)^{4} 
0.82 
0.89 
0.77 
– 
0.74 

Return on invested capital
(ROIC)^{5} 
5.16% 
6.75% 
2.51% 
0.12% 
2.22% 

Averages 

RR 
0.80 

ROIC 
3.31% 

Growth rate of FCFF (g)^{6} 
0.00% 
^{1} See Details »
2017
Calculations
^{2} Interest expense, after tax =
Interest expense × (1 – EITR)
= 848 × (1 – 20.20%)
= 677
^{3} EBIT(1 – EITR) = Net income
(loss) + Interest expense, after tax
= 3,033 + 677 = 3,710
^{4} RR = [EBIT(1 – EITR) – Interest
expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [3,710 – 677]
÷ 3,710 = 0.82
^{5} ROIC = 100 × EBIT(1 – EITR) ÷
Total capital
= 100 × 3,710 ÷ 71,856 = 5.16%
^{6} g = RR × ROIC
= 0.80 × 3.31%
= 0.00%
Amazon.com
Inc., Hmodel
Year 
Value 
g_{t} 
1 
g_{1} 
0.00% 
2 
g_{2} 
0.00% 
3 
g_{3} 
0.00% 
4 
g_{4} 
0.00% 
5 and thereafter 
g_{5} 
0.00% 
where:
g_{1} is implied by PRAT model
g_{5} is implied by singlestage model
g_{2}, g_{3} and g_{4} are calculated using linear interpoltion between g_{1} and g_{5}
Calculations
g_{2} = g_{1} + (g_{5} – g_{1}) × (2 – 1) ÷ (5 – 1)
= 0.00% + (0.00%
– 0.00%) × (2 – 1) ÷ (5 – 1) = 0.00%
g_{3} = g_{1} + (g_{5} – g_{1}) × (3 – 1) ÷ (5 – 1)
= 0.00% + (0.00%
– 0.00%) × (3 – 1) ÷ (5 – 1) = 0.00%
g_{4} = g_{1} + (g_{5} – g_{1}) × (4 – 1) ÷ (5 – 1)
= 0.00% + (0.00%
– 0.00%) × (4 – 1) ÷ (5 – 1) = 0.00%
Week
2
Chapter 1 An
Overview of Financial Management
Chapter overview:
This chapter provides a basic idea of what
financial management/managerial finance/corporate finance is all about,
including an overview of the financial environment (financial markets,
institutions, and securities/instruments)
in which corporations operate.
Note:
Flow of funds
describes the financial assets flowing from various sectors through financial
intermediaries for the purpose of buying physical or financial assets.
*** Household,
nonfinancial business, and our government
Financial institutions
facilitate exchanges of funds and financial products.
*** Building blocks of
a financial system. Passing and transforming funds and risks during
transactions.
*** Buy and sell,
receive and deliver, and create and underwrite financial products.
*** The transferring
of funds and risk is thus created. Capital utilization for individual and for
the whole economy is thus enhanced.
Chapter 4 Time
Value of Money
(review)
Topics:
·
Future Value and Compounding
·
Present Value and Discounting
·
Rates of Return/Interest Rates
·
Number of periods
·
Amortization
Amortization Table example:
Hint: In excel, find amortization
template.
Solution:
Calculator:
https://www.jufinance.com/tvm/ 
TVM calculator
https://www.jufinance.com/nfv/  net future value calculator
Equations:
FV = PV *(1+r)^n
PV = FV /
((1+r)^n)
N
= ln(FV/PV) / ln(1+r)
Rate = (FV/PV)^{1/n} 1
Annuity:
N
= ln(FV/C*r+1)/(ln(1+r))
Or
N
= ln(1/(1(PV/C)*r)))/ (ln(1+r))
Excel Formulas
To get FV, use FV
function.
=abs(fv(rate, nper,
pmt, pv))
To get PV, use PV
function
= abs(pv(rate, nper,
pmt, fv))
To get r, use rate
function
=
rate(nper, pmt, pv, fv)
To get number of years,
use nper function
= nper(rate, pmt, pv,
fv)
To get annuity payment, use PMT
function
= abs(pmt(rate, nper, pv,
fv))
In Class Exercise:
1. You want to
retire early so you know you must start saving money. Thus, you have decided
to save $4,500 a year, starting at age 25. You plan to retire as soon as you
can accumulate $500,000. If you can earn an average of 11 percent on your
savings, how old will you be when you retire? (49.74 years)
Answer: nper(11%, 4500, 0, 500000)+25
2. Fred was persuaded to open a credit card account and now owes $5,150
on this card. Fred is not charging any additional purchases because he wants
to get this debt paid in full. The card has an APR of 15.1 percent. How much
longer will it take Fred to pay off this balance if he makes monthly payments
of $70 rather than $85? (93.04 months)
Answer: nper(15.1%/12, 70, 5150, 0)  nper(15.1%/12, 85, 5150, 0)
3. At the end of this month, Bryan will start saving $80 a month for
retirement through his company's retirement plan. His employer will
contribute an additional $.25 for every $1.00 that Bryan saves. If he is
employed by this firm for 25 more years and earns an average of 11 percent on
his retirement savings, how much will Bryan have in his retirement account 25
years from now? ($157,613.33)
Answer: Bryan’s monthly contribution:
80+80*0.25 = 100
Fv(11%/12, 25*12, 100, 0))
4. Sky
Investments offers an annuity due with semiannual payments for 10 years at 7
percent interest. The annuity costs $90,000 today. What is the amount of each
annuity payment? ($6,118.35)
Answer: pmt(7%/2, 10*2, 90000, 0)
5. Mr. Jones just won a lottery prize that will pay him $5,000 a year
for thirty years. If Mr. Jones can
earn 5.5 percent on his money, what are his winnings worth to him
today? ($76,665.51)
Answer: pv(5.5%, 30, 5000, 0)
Chapter 5 Bond,
Bond Valuation and Interest Rates
Topics in Chapter 5:
·
Key features of bonds
·
Bond valuation
·
Measuring yield
·
Assessing risk
Market data website:
1. FINRA
http://finramarkets.morningstar.com/BondCenter/Default.jsp (FINRA
bond market data)
2. WSJ
Market watch on Wall Street Journal has daily
yield curve and bond yield information.
http://www.marketwatch.com/tools/pftools/
http://www.youtube.com/watch?v=yph8TRldW6k
3. Bond Online
http://www.bondsonline.com/Todays_Market/
Simplified
Balance Sheet of WalMart
In
Millions of USD 
As of 20200131 
Total
Assets 
236,495,000 
Total
Current Liabilities 
16,203,000 
Long Term Debt 
64,192,000 
Total
Liabilities 
154,943,000 
Total
Equity 
81,552,000 
Total
Liabilities & Shareholders' Equity 
236,495,000 
https://www.wsj.com/marketdata/quotes/WMT/financials/annual/balancesheet
FINRA – Bond
market information
http://finramarkets.morningstar.com/BondCenter/Default.jsp
http://finramarkets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C104227&symbol=WMT.GP
7.550
%
02/15/2030
Symbol
WMT.GP 
CUSIP
931142BF9 
Next Call Date
— 
Callable
— 
Last Trade Price
$150.75 
Last Trade Yield
1.498% 
Last Trade Date
02/12/2021 
US Treasury Yield
— 

Moody's® Rating 
Aa2 (5/9//2018) 
Standard & Poor's
Rating 
AA (02/10/2000) 
TRACE Grade 
Investment Grade 
Default 
— 
Bankruptcy 
N 
Insurance 
— 
Mortgage Insurer 
— 
PreRefunded/Escrowed 
— 
Additional Description 
Senior Unsecured Note 
Bond Type 
US Corporate Debentures 
Debt Type 
Senior Unsecured Note 
Industry Group 
Industrial 
Industry Sub Group 
Retail 
SubProduct Asset 
CORP 
SubProduct Asset Type 
Corporate Bond 
State 
— 
Use of Proceeds 
— 
Security Code 
— 
Special
Characteristics
Medium Term Note 
N 
*dollar amount in thousands 

Offering Date 
02/09/2000 
Dated Date 
02/15/2000 
First Coupon Date 
08/15/2000 
Original Offering* 
$1,000,000.00 
Amount Outstanding* 
$1,000,000.00 
Series 
— 
Issue Description 
— 
Project Name 
— 
Payment Frequency 
SemiAnnual 
Day Count 
30/360 
Form 
Book Entry 
Depository/Registration 
Depository Trust Company 
Security Level 
Senior 
Collateral Pledge 
— 
Capital Purpose 
— 
*dollar amount in thousands 

Original Maturity Size* 
1,000,000.00 
Amount Outstanding Size* 
1,000,000.00 
Yield at Offering 
7.56% 
Price at Offering 
$99.84 
Coupon Type 
Fixed 
Escrow Type

·
The attached Walmart
Bond prospects says:
“We are offering $500,000,000 of our 1.000% notes due 2017 (symbol WMT4117476), $1,000,000,000 of our 3.300% notes due 2024
(symbol WMT4117477) and
$1,000,000,000 of our 4.300% notes due 2044 (symbol WMT4117478)
Risk of Bonds
Class discussion: Is bond market risky?
Bond
risk (video)
Bond
risk – credit risk (video)
Bond
risk – interest rate risk (video)
Bond
risk – how to reduce your risk (video)
1. AAA firm’s bonds’ market value is $1,120,
with 15 years maturity and coupon of $85. What is YTM? (7.17%, rate(15, 85, 1120, 1000))
2. Sadik Inc.'s bonds
currently sell for $1,180 and have a par value of $1,000. They pay
a $105 annual coupon and
have a 15year maturity, but they can be called in 5 years at
$1,100. What is their yield to call (YTC)? (7.74%, rate(15, 105, 1180, 1100))
3. Assume that you are
considering the purchase of a 20year, noncallable bond with an annual coupon
rate of 9.5%. The bond has a face value of $1,000, and it makes
semiannual interest payments. If you require an 8.4% nominal yield
to maturity on this investment, what is the maximum price you should be
willing to pay for the bond? ($1,105.69, abs(pv(8.4%/2, 20*2, 9.5%*1000/2,
1000)) )
4. McCue Inc.'s
bonds currently sell for $1,250. They pay a $90 annual coupon, have a 25year
maturity, and a $1,000 par value, but they can be called in 5 years at
$1,050. Assume that no costs other than the call premium would be
incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with
rates expected to remain at current levels on into the
future. What is the difference between this bond's YTM and its
YTC? (Subtract the YTC from the YTM; it is possible to get a
negative answer.) (2.62%, YTM = rate(25, 90, 1250, 1000), YTC = rate(5, 90, 1250, 1050))
5. A 25year, $1,000
par value bond has an 8.5% annual payment coupon. The bond
currently sells for $925. If the yield to maturity remains at its
current rate, what will the price be 5 years from now? ($930.11,
rate(25, 85, 925, 1000), abs(pv( rate(25, 85, 925, 1000), 20, 85, 1000))
Assignments
(due with the midterm exam)
Chapter 5  case 2 part 1 (help video: https://www.jufinance.com/video/fin534_case2_2021_spring_part_1.mp4) – posted
Chapter 5  case 2 part 2 (help video: https://www.jufinance.com/video/fin534_case2_2021_spring_part_2.mp4) – posted
2.
Develop an amortization
schedule in Excel for a fiveyear car loan of $30,000 with APR of 3%
(hint: use amortization
loan template in excel)
3.
Chapter 4 End of Chapter Problems
(not questions): 1, 2, 3, 4, 16, 17, 19, 27 (chapter 4
homework solution all inclusive fyi only)
Chapter 4 Homework assignments – Spring 2021
Page 186:
41: If you deposit $10,000 in a bank account that pays 10% interest annually. How much will be in your account after 5 years?
42: What is the present value of a security that will pay $5000 in 20 years if securities of equal risk pay 7% annually.
43: Your parents will retire in 18 years. They currently have $250,000 and they think they will need $1 million at retirement. What annual interest rate must they earn to reach their goal, assuming they do not save any additional funds?
44: If you deposit money today in an account that pays 6.5% annual interest, how long will it take to double your money?
416: Find the amount to which $500 will grow under each of the following conditions.
a. 12% compounded annually for 5 years.
b. 12% compounded semiannually for 5 years.
c. 12% compounded quarterly for 5 years.
d. 12% compounded monthly for 5 years.
417: Find the present value of $500 due in the future under each of the following conditions.
a. 12% nominal rate, semiannual compounding, discounted back 5 years
b. 12% nominal rate, quarterly compounding, discounted back 5 years
c. 12% nominal rate, monthly compounding, discounted back 5 years
419: Universal bank
pays 7% interest, compounded annually, on time deposits. Regional
bank pays 6% interest, compounded quarterly.
a.
Based on effective interest rates, in
which bank would you prefer to deposit your money?
b.
Could your choice of banks be influenced
by the fact that you might want o withdraw your funds during the year as
opposed to at the end of the year? In answering this question, assume that
funds must be left on deposit during an entire compounding period in order
for you to receive any interest.
427:
What is the present value of a perpetuity of $100 per year if the appropriate
discount rate is 7%? If interest rates in general were to double and the
appropriate discount rate rose to 14%, what would happen to the present value
of the perpetuity?
Updated
Feb 26, 2021
What Are Negative Interest Rates? (FYI)
Negative
interest rates occur when borrowers are credited interest rather than paying
interest to lenders. While this is a very unusual scenario, it is most likely
to occur during a deep economic recession when monetary efforts and market
forces have already pushed interest rates to their nominal zero bound.
Typically,
a central bank will charge commercial banks on their reserves as a form of
nontraditional expansionary monetary policy, rather than crediting them
interest. This extraordinary monetary policy tool is used to strongly
encourage lending, spending, and investment rather than hoarding cash, which
will lose value to negative deposit rates. Note that individual depositors
will not be charged negative interest rates on their bank accounts.
KEY
TAKEAWAYS
• Negative interest rates occur when
borrowers are credited interest rather than paying interest to lenders.
• With negative interest rates,
central banks charge commercial banks on reserves in an effort to incentivize
them to spend rather than hoard cash positions.
• With negative interest rates,
commercial banks are charged interest to keep cash with a nation's central
bank, rather than receiving interest. Theoretically, this dynamic should
trickle down to consumers and businesses, but commercial banks have been
reluctant to pass negative rates onto their customers.
Understanding
a Negative Interest Rate
While
real interest rates can be effectively negative if inflation exceeds the
nominal interest rate, the nominal interest rate is, theoretically, bounded by
zero. Negative interest rates are often the result of a desperate and
critical effort to boost economic growth through financial means.
The
zerobound refers to the lowest level that interest rates can fall to; some
forms of logic would dictate that zero would be that lowest level. However,
there are instances where negative rates have been implemented during normal
times. Switzerland is one such example; as of mid2020, its target interest
rate was 0.75%.1 Japan adopted a similar policy, with a mid2020 target rate
of 0.1%.2
Negative
interest rates may occur during deflationary periods. During these times,
people and businesses hold too much money—instead of
spending money—with the expectation that a dollar
will be worth more tomorrow than today (i.e., the opposite of inflation).
This can result in a sharp decline in demand, and send prices even lower.
Often,
a loose monetary policy is used to deal with this type of situation. However,
when there are strong signs of deflation factoring into the equation, simply
cutting the central bank's interest rate to zero may not be sufficient enough
to stimulate growth in both credit and lending.
In a
negative interest rate environment, an entire economic zone can be impacted
because the nominal interest rate dips below zero. Banks and financial firms
have to pay to store their funds at the central bank, rather than earn
interest income.
Consequences
of Negative Rates
A
negative interest rate environment occurs when the nominal interest rate
drops below zero percent for a specific economic zone. This effectively means
that banks and other financial firms have to pay to keep their excess
reserves stored at the central bank, rather than receiving positive interest
income.
A
negative interest rate policy (NIRP) is an unusual monetary policy tool.
Nominal target interest rates are set with a negative value, which is below
the theoretical lower bound of zero percent.
During
deflationary periods, people and businesses tend to hoard money, instead of
spending money and investing. The result is a collapse in aggregate demand,
which leads to prices falling even further, a slowdown or halt in real
production and output, and an increase in unemployment.
A loose
or expansionary monetary policy is usually employed to deal with such
economic stagnation. However, if deflationary forces are strong enough,
simply cutting the central bank's interest rate to zero may not be sufficient
to stimulate borrowing and lending.
Example
of a Negative Interest Rate
In recent
years, central banks in Europe, Scandinavia, and Japan have implemented a
negative interest rate policy (NIRP) on excess bank reserves in the financial
system. This unorthodox monetary policy tool is designed to spur economic
growth through spending and investment; depositors would be incentivized to
spend cash rather than store it at the bank and incur a guaranteed loss.
It's
still not clear if this policy has been effective in achieving this goal in
those countries, and in the way it was intended. It's also unclear whether or
not negative rates have successfully spread beyond excess cash reserves in
the banking system to other parts of the economy.
Frequently
Asked Questions
How can
interest rates turn negative?
Interest
rates tell you how valuable money is today compared to the same amount of
money in the future. Positive interest rates imply that there is a time value
of money, where money today is worth more than money tomorrow. Forces like
inflation, economic growth, and investment spending all contribute to this
outlook. A negative interest rate, by contrast, implies that your money will
be worth more in the future, not less.
What do negative interest rates mean for
people?
Most instances of negative interest rates
only apply to bank reserves held by central banks; however, we can ponder the
consequences of more widespread negative rates. First, savers would have to
pay interest instead of receiving it. By the same token, borrowers would be
paid to do so instead of paying their lender. Therefore, it would incentivize
many to borrow more and larger sums of money and to forgo saving in favor of
consumption or investment. If they did save, they would save their cash in a
safe or under the mattress, rather than pay interest to a bank for depositing
it. Note that interest rates in the real world are set by the supply and
demand for loans (despite central banks setting a target). As a result, the
demand for money inuse would grow and quickly restore a positive interest
rate.
Where do
negative interest rates exist?
Some
central banks have set a negative interest rate policy (NIRP) in order to
stimulate economic growth in the financial sector, or else to protect the
value of a local currency against exchangerate increases due to large
inflows of foreign investment. Countries including Japan, Switzerland,
Sweden, and even the ECB (eurozone) have adopted NIRPs at various points over
the past two decades.
Why
would a central bank adopt a NIRP to stimulate the economy?
Monetary
policymakers are often afraid of falling into a deflationary spiral. In harsh
economic times, such as deep economic recessions or depressions, people and
businesses tend to hold on to their cash while they wait for the economy to
improve. This behavior, however, can weaken the economy further as a lack of
spending causes further job losses, lowers profits, and prices to drop—all of which reinforces people’s
fears, giving them even more incentive to hoard. As spending slows even more,
prices drop again, creating another incentive for people to wait as prices
fall further. And so on. When central banks have already lowered interest
rates to zero, the NIRP is a way to incentivize corporate borrowing and
investment and discourage hoarding of cash.
https://www.investopedia.com/terms/n/negativeinterestrate.asp
Bond Pricing Formula (FYI)
Bond Pricing Excel Formula
To calculate bond
price in EXCEL (annual coupon bond):
Price=abs(pv(yield to maturity, years
left to maturity, coupon rate*1000, 1000)
To calculate yield
to maturity (annual coupon bond)::
Yield to maturity = rate(years left to
maturity, coupon rate *1000, price, 1000)
To calculate bond
price (semiannual coupon bond):
Price=abs(pv(yield to maturity/2,
years left to maturity*2, coupon rate*1000/2, 1000)
To calculate yield
to maturity (semiannual coupon bond):
Yield to maturity = rate(years left to
maturity*2, coupon rate *1000/2, price, 1000)*2
Function Description
The Excel Price
function calculates the price, per $100 face value of a security that pays
periodic interest.
The syntax of the
function is:
PRICE( settlement, maturity, rate, yld, redemption, frequency, [basis] )
The Excel YIELD
function calculates the Yield of a security that pays periodic interest.
The syntax of the
function is:
YIELD( settlement, maturity, rate, pr, redemption, frequency, [basis] )
Where the arguments
are as follows:
pr 
 
The security's price
per $100 face value. 
settlement 
 
The settlement date
of the security (i.e. the date that the coupon is purchased). 

maturity 
 
The maturity date of
the security (i.e. the date that the coupon expires). 

Rate 
 
The security's
annual coupon rate. 

Yld 
 
The annual yield of
the security. 

redemption 
 
The security's
redemption value per $100 face value. 

frequency 
 
The number of coupon payments per year. This
must be one of the following:


[basis] 
 
An optional integer
argument which specifies the financial day count basis that is used by the security.
Possible values are: 



The financial day
count basis rules are explained in detail on the Wikipedia Day Count
Convention page 
https://www.excelfunctions.net/excelpricefunction.html
https://www.excelfunctions.net/excelyieldfunction.html
Function Description
The Excel Accrint
function returns the accrued interest for a security that pays periodic
interest.
The syntax of the
function is:
ACCRINT( issue, first_interest, settlement, rate, [par], frequency, [basis], [calc_method] )
Where the arguments
are as follows:
issue 
 
The issue date of
the security. 
first_interest 
 
The security's first
interest date. 
settlement 
 
The security's
settlement date. 
rate 
 
The security's
annual coupon rate. 
[par] 
 
The security's par value. If omitted, [par] takes the
default value of 1,000. 
frequency 
 
The number of coupon
payments per year (must be equal to 1, 2 or 4). 
[basis] 
 
An optional argument, that specifies the day
count basis to be used in the calculation. 

Week
3
Chapter 6 Risk
and Return
Topics in Chapter 6:
·
Basic return and risk concepts
·
Standalone risk
·
Risk in a Portfolio Context
·
Risk and return: CAPM/SML
·
Market equilibrium and market efficiency
Please use the
following Excel file to learn how to estimate how risky those securities are.
WMT, AMAZON,
APPLE, and S&P500 stock prices March 2016 ~ March 2021
(solution. Updated for S&P on 4/19/2021)
Summary of Excel
functions:
Mean  average
function
Risk (standard
deviation)  stdev function
Correlation between
two stocks  correl function
Covariance between two
stocks  covar function
Beta (risk)  slope
function
A Single Stock, like WMT
Example:
1. Realized return
Holding period return (HPR) = (Selling price – Purchasing price
+ dividend)/ Purchasing price
HPR calculator (www.jufinance.com/hpr)
2. Expected return of this stock and its standard
deviation
Expected return and risk
(standard deviation) calculator (www.jufinance.com/return)
A portfolio of two stocks, like WMT and Amazon
Portfolio Calculator (www.jufinance.com/portfolio) – see equations
below
Equation:
W1 and W2 are the
percentage of each stock in the portfolio.
A portfolio of three stocks, like WMT, Amazon, and APPLE
Three stocks is the
sum of three pairs of twostockportfolio. So same as above but repeat it
three times.
A diversified portfolio with 25 stocks and more
As more stocks are
added, each new stock has a smaller riskreducing impact on the portfolio.
s_{p} falls very slowly after
about 40 stocks are included. The lower limit for s_{p} is
about 20% = s_{M} (M: market portfolio).
By forming welldiversified portfolios,
investors can eliminate about half the risk of owning a single stock.
Market risk is that part of a security’s
standalone risk that cannot be eliminated by diversification.
Firmspecific, or diversifiable, risk is that
part of a security’s standalone risk that can be eliminated by
diversification.
CAPM model (CAPM calculator)
1. What is Beta? Where to find Beta?
2. Why can we use beta as measure for risk?
3. What is three month Treasurye bill’s beta?
S&P500 index’s beta? WMT’s beta? Amazon’s beta? Why are they different?
4. Use CAPM to calculate the expected return of
the above stocks
5. Find those stocks in SML
Assignment of chapter
6: Chapter 6 Case study (due with mid term exam)
(help video: https://www.jufinance.com/video/fin534_case3_2021_spring.mp4)
No other problem solving assignments for
chapter 6 (sorry for the post on blackboard under week 3 assignment. There is
a blackboard problem I could not fix.)
First, we need to have two samples of the
same size: The returns for a company, and the returns of the market
for the same period of time. Note: You need to provide
the returns and NOT the actual stock values in order for the calculations to
be correct.
Then, a linear regression is conducted
and the estimated slope of the regression model using the returns of the
company as the dependent variable and the returns of the market as the
independent variable will be the beta we are looking for.
The actual definition of beta is :
This formula is less clear for many people
because the covariance is a less understood
measure and some people do not know how to compute it.
Ultimately, the calculation
of the beta as a slope coefficient of the regression between company and
market returns has a stronger intuitive appeal.
Calculation beta in Excel is easy. You need to go to a
provider of historical prices, such as Yahoo finance. Then you clean all
you need to clean and leave only adjusted prices.
Your market data could be
the S&P 500 or any other market proxy. Then, by subtracting and dividing
by the base value, you will get the returns, for both your company and the
market.
Then, you will run a
regression with the company returns as the dependent variable, and the market
returns as the independent variable.
Finally, you will examine
your regression output, and select the estimated slope coefficient. That will
be the beta you are looking for.
Why is it useful to compute the beta of a firm? Because it
gives a measure of how risky the firm's stock is with respect to the market,
and it tells us how much should be our expected return based ion that level
of risk, via de CAPM model.
RISK and Return General Template (standard deviation, correlation, beta)
In Class
Exercise
1. An investor currently holds the following
portfolio: He invested 30% of the fund in Apple with Beta equal 1.1. He also
invested 40% in GE with Beta equal 1.6. The rest of his fund goes to Ford,
with Beta equal 2.2. Use the above information to answer the following
questions.
1) The beta for the portfolio is? (1.63)
2) The three month Treasury bill rate (this is
risk free rate) is 2%. S&P500 index return is 10% (this is market
return). Now calculate the portfolio’s return. (15.04%)
Answer:
1) Portfolio beta = 0.3*1.1 + 0.4*1.6 +
(10.30.4)*2.2 = 1.63
2)
Portfolio
return = 2% + 1.63*(10%2%) = 15.04%
2. Your current portfolio’s
BETA is about 1.2. Your total investment is worth around $200,000. You uncle
just gave you $100,000 to invest for him. With this $100,000 extra funds in
hand, you plan to invest the whole $100,000 in additional stocks to increase
your whole portfolio’s BETA to 1.5 (Your portfolio now worth $200,000 plus
$100,000). What is the average BETA of the new stocks to achieve your goal?
(hint: write down the equation of the portfolio’s Beta first) (2.1)
Answer:
·
Weight of
the original fund = 200000/(200000+100000) = 2/3
·
Weight of
new fund = 12/3 = 1/3
·
So protfolio
beta = 1.5 = (2/3)*1.2 + (1/3)* X è X=2.1
3. What is the coefficient of variation on
the company's stock?
Probability Stock's
State
of of
State
the
Economy Return
Boom 0.45 25%
Normal 0.50 15%
Recession 0.05 5%
ANSWER:
Or,
Probability
of Return Deviation Squared State
Prob.
This
state This
state from Mean Deviation ×
Sq. Dev.
0.45 25.00% 6.00% 0.36% 0.1620%
0.50 15.00% 4.00% 0.16% 0.0800%
0.05 5.00% 14.00% 1.96% 0.0980%
Expected return = 19.00% 0.34% 0.3400% =
Expected variance
σ
= 5.83%
Coefficient
of variation = σ/Expected return
= 0.3069
4. What's the
standard deviation?
Economic
Conditions Prob. Return
Strong 30% 32.0%
Normal 40% 10.0%
Weak 30% 16.0%
ANSWER:
Or,
Economic Return Dev.
from Squared Sqd.
dev.
Conditions Prob. This
state Mean Dev. × Prob
Strong 30% 32.0% 23.20% 5.38% 1.61%
Normal 40% 10.0% 1.20% 0.01% 0.01%
Weak 30% 16.0% 24.80% 6.15% 1.85%
100% 8.8% Variance 3.47%
σ = Sqrt of
variance 18.62% 18.62% by
Excel
5. returns
are shown below. What's the standard deviation of the firm's
returns? (Hint: This is a sample, not a complete population.
USE the sample standard deviation formula)
Year Return
2008 21.00%
2007 12.50%
2006 25.00%
ANSWER: IN
EXCEL, STDEV SYNTAX.
Or,
Deviation Squared
Year Return from
Mean Deviation
2008 21.00% 9.83% 0.97%
2007 12.50% 23.67% 5.60%
2006 25.00% 13.83% 1.91%
Expected
return 11.17% 8.48% Sum
sqd deviations
4.24% Sum/(N
− 1)
SQRT = σ =
20.59% 20.59% with
Excel
Week
4
· Review and Q&A class url https://www.jufinance.com/video/fin534_week4_2021_spring.mp4
· case studies 13 due; chapter 4 homework and amortization exercise
·
Midterm Exam
·
(120 minutes): Chapters 4, 5
& 6, on blackboard under week4 folder
Mid Term Study
Guide
Calculation
questions 17 (total 62 points)
Three questions are about time value of money
(chapter 4)
· Just be careful the question is based on annual compounding or monthly compounding.
· One question is about the mortgage loan and ask for monthly payment.
Two questions are about bond
pricing (chapter 5)
· Calculate bond price, given coupon rate, years left to maturity, and ytm.
· Calulate YTM, YTC (yield to call), current yield and capital gain yield (similar to case study exercise)
Two questions are about risk
and return (chapter 6)
· Calculate expected return and standard deviation, given probabilities and returns (similar to case study exercise)
· Calculate portfolio return based on CAPM
True
/ false questions (11*2 = 22 points)
Multiple
choice conceptual questions (4*9=36)
Topics
covered:
· About bond concept, such as what is YTM, price, coupon, face value, YTC, call provision, current yield
· Short term bond vs. long term bond
· Treasury bond vs. Corporate bond vs. munibond vs. junk bond
· Noncallable bond vs. callable bond
· Diversification and risk
· Beta vs. standard deviation
· Firm specific risk (unsystematic risk) vs. market risk (systematic risk)
· What is risk free rate, what is market risk, what is CAPM
· What is EAR? How to compare different rates offered by banks?
Week
5
Chapter 7 Valuation of Stocks and
Corporations
Topics in Chapter 7:
· Features
of common stock
· Valuing
common stock
o
Dividend growth model
o
Market multiples
· Preferred
stock
Part I: Dividends
For class discussion:
·
What
is dividend growth model? Why can we use dividend to estimate a firm’s
intrinsic value?
·
Are
future dividends predictable?
·
Refer
to the following table for WMT’s dividend history
http://stock.walmart.com/investors/stockinformation/dividendhistory/default.aspx
· Refer to the following table for Walmart (WMT’s dividend history)
http://stock.walmart.com/investors/stockinformation/dividendhistory/default.aspx
Record Dates 
Payable Dates 
Amount 
Type 
March 20, 2020 
April 6, 2020 
$0.54 
Regular Cash 
May 8, 2020 
June 1, 2020 
$0.54 
Regular Cash 
Aug. 14, 2020 
Sept. 8, 2020 
$0.54 
Regular Cash 
Dec. 11, 2020 
Jan. 4, 2021 
$0.54 
Regular Cash 
Record Dates 
Payable Dates 
Amount 
Type 
March 15, 2019 
April 1, 2019 
$0.53 
Regular Cash 
May 10, 2019 
June 3, 2019 
$0.53 
Regular Cash 
Aug. 9, 2019 
Sept. 3, 2019 
$0.53 