You are thinking about investing $5000 in your friend's landscaping business. Even though you know the investment is risky and you can't be sure of the outcome, you expect your investment to be worth $5750 next year. You notice that the rate for one-yearTreasury bills is 1%. However, you feel that other investments of equal risk to your friend's landscape business offer an expected return of 10% for the year. What should you do?.....The present value of the return is $(Round to the nearest cent.)

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Answered: You are thinking about investing $5000…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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David Rubin has $100,000 to invest over 5 years. David is very risk-averse and has a target average return of 4% per year for his investment over the next 5 years. He is looking at investing his money in the 3-month US Treasury Bill, which currently yields 4% per year. What are the pros and cons of David investing in this 3-month T-Bill in the context of his risk-proflle and his investment objective? If a company's beta were to double, would its expected rate of return double? Explain your answer. Using the five components of a nominal interest rate, explain why a US corporate bond's yield-to- maturity (YTM) is always greater than the YTM of a US Treasury bond of similar maturity.
Your group receives a phone proposal to invest in a new business. Thecaller informs you that it will take a $70,000 down payment and the investmentwill return $10,000 a year for the next 10 years. He tells you that theinvestment will return 14 percent. If current interest rates are 8 percent,what is the present value of this investment? How did the caller get14 percent?
Mr. New Retiree is about to retire after an illustrious career in the Zambian civil service. He is expecting to receive a net of K2.5 million in retirement benefits. As an Investment Advisor, you have been approached by Mr. New Retiree to advise on the options available for him to consider. Advise on the main asset classes available in Zambia clearly showing the common investment time horizon for each. What is the most money you could make over the next year?
Based on the framework in the previous two problems, you have found that you need to have a total of $1,529,499 in savings at the time you retire, in 40 years. You currently only have $28,118 saved up in your retirement accounts. If you anticipate that your 80/20 investment portfolio will return an average of 8.31% per year, how much extra must you save every year to reach your goal? Assume that you'll be saving the extra amount by the end of each year.
A potential client comes to you and asks you to help him pick some stocks and that we wants his investments to earn at least 10% guaranteed annually. He also doesn’t understand why you want him to invest in a variety of asset classes. How would you explain the importance of diversification to him and what would you say in response to his request for a 10% guaranteed annual return on his investment?
You are thinking about investing $4,953 in your friend's landscaping business. Even though you know the investment is risky and you can't be sure, you expect your investment to be worth $5,650 next year. You notice that the rate for one-year Treasury bills is 1%. However, you feel that other investments of equal risk to your friend's landscape business offer an expected return of 10% for the year. What should you do? The present value of the return is $ (Round to the nearest cent.)
You have an investment opportunity that promises to pay you $18,000 in four years. You could earn a 5% annual return investing elsewhere. What is the maximum amount you would be willing to invest in this opportunity? Note: Use tables, Excel, or a financial calculator. Round your final answer to nearest whole dollar amount. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)
A real estate property is on the market. You have estimated it will give you net cash flows of $5136 per month. You hope to sell it in 9 years for $308182. Your required return is 9.46%, how much should you be willing to pay for the property today? Answer:
Suppose you bought a condo for $100,000 financing it with a $20,000 down payment of your own funds and an $80,000 mortgage loan from a bank. Assume that the market value of your condo has now risen to $120,000. Ignoring interest and other costs, and assuming the loan amount is still $80,000, calculate your rate of return on your asset (ROA) and your rate of return on equity (ROE).
Let us develop a savings plan for your retirement. We will assume that you will be fin-ished with your schooling by age 25, and work for 40 years to retire at age 65. Let us (verygenerously and optimistically) imagine that you will receive a substantial graduation giftof $10,000, and will open an investment account with it that (again, quiteoptimistically) can be expected to reliably pay 8% interest, compounded continuously. Inaddition, you will plan to save a portion of your paycheck each week, for a total of D dollarsper year, every year. Determine D, i.e how much you need to add to your account from yourearnings every year, in order to retire with a princely sum of $2,000,000 in your retirementaccount.
The amount the bank is willing to loan you to start your business is not enough to cover the initial investment you need to make. You need an additional $10,000. You approach an investor and ask him to invest $10,000 in your business. In return, you offer to pay him $500 out of your profits at the end of years 1-4 and an amount X at the end of year 5. The investor's annual cost of funds is 10%. How big must X be to induce him to invest in your business?

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