Finance Discount Rate Question?
You will receive $800 in 3 periods and $1200 in 4 periods. How much are those two cash flows worth today, if your discount rate is 6% per period? Answer options are: A) $1475.67 B) $1504.78 C) $1568.90 D) $1622.21 E) $1641.21
What is a discount rate in finance? How does a bank decide it?
This is a bit too much for one question. These break down quite a bit too.The interest rate charged to commercial banks and other depository institutions for loans received from the Federal Reserve Bank’s discount window. The discount rate also refers to the interest rate used in discounted cash flow (DCF) analysis to determine the present value of future cash flows. The discount rate in DCF analysis takes into account not just the time value of money, but also the risk or uncertainty of future cash flows; the greater the uncertainty of future cash flows, the higher the discount rate. A third meaning of the term “discount rate” is the rate used by pension plans and insurance companies for discounting their liabilities.Read more: Discount Rate Definition | Investopedia http://www.investopedia.com/terms/
Finance: With appropriate discount rate, what is the price of one share of this stock? 10 POINTS!?
You are considering the purchase of XYZ Company's common stock which will pay a $1.00 per share dividend one year from the date of purchase. The dividend is expected to grow at the rate of 4% per year. If the appropriate discount rate for this investment is 14%, what is the price of one share of this stock? a) $10,000 b) $7.14 c) $25.00 d) Cannot be determined without maturity date My guess is (d) because there's no information on future value or payments. Any help would be greatly appreciated.
What is the difference between interest rate and discount rate in banking?
Interest Rate...Interest is the cost a borrower pays to use someone else's money. Say you take out a $100,000 mortgage at a 8 percent annual interest rate. The bank didn't really "give" you $100,000. It's just letting you use its money for a while. You'll pay the money back, of course, but each year, you'll also pay the bank 8 percent of your outstanding mortgage balance for the privilege of using its money. Car loans, credit cards, student loans, housing loan..they all work on the same principle. Buy a bond or put money in a savings account, and you'll be the one earning interest: Someone will pay you for the privilege of using your money.This interest rate reflacts risk i.e. the chances that the loan amount won't be repaid. This is the reason all lousy credits are having higher borrowing cost.Discount rate....This is of more interest to investors. It's the rate you use when adjusting for the "time value of money." The time value of money is a basic principle of finance. It means that a certain amount of money has different values at different points in time. Given a choice between receiving $1000 today and getting $1000 in a year, you should take the money now. You could invest it, and if you earned any return at all (even a risk-free rate), you'd end up with more than $1000 a year from now.Basically discounting rate is used to find out present and future value of money...
How to find the discount rate with the BA II PLUS financial calculator?
A better way to state you Question is: What is the rate of appreciation (i/Yr) for a painting that is purchased today for $2M (PV) and sold 5yrs from now (n=60) for $5M (FV)... there being no additional outlays during the coming 5yrs (PMT = zero). Input the above and Press the (i/Yr) button to get the answer of 18.466% per yr.
IRR greater than Discount rate....?
IRR or Internal Rate of Return is the investor's required rate of return. At this rate the Initial Cash Outlay for the project proposal equals the present value of expected net cash flows. In other words NPV is zero at IRR. Say we were evaluating a project proposal where the Initial Cash Outlay is $10,000 and we were expecting net cash flows at the end of each of the next four years for $5,000 $4,000 $3,000 and $1,000 and the cost of the project or discount rate (also called hurdle rate) is 11% The IRR or the internal rate of return for this project comes out to 14.49% NPV @ 14.49% = $0 So what does it mean Let's answer this with finding Net Present Value at the Discount Rate of 11% NPV @ 11% = $603.30 ( a positive amount ) At 11% percent the Net Present Value of the project is $603.30 which will make the investment proposal a viable option Had the Discount Rate been higher than the IRR, say the Discount Rate offered to us for this project is 16% What is the NPV at 16%? The answer is NPV @ 16% is -$242.74 ( a negative amount ) Thus at a Discount Rate higher than IRR our investment proposal would be a losing proposition To sum it up an NPV is Zero at IRR A Discount Rate lower than IRR will yield a positive NPV thus we will accept the Project Proposal A Discount Rate higher than IRR will yield a negative NPV thus we will reject the Project Proposal In conclusion, if you were offered a Discount Rate of 11% and IRR is 14%, you should accept the project proposal given that you were comparing this proposal along with other mutually exclusive projects
Financial Accting-How to determine discount rate for bonds?
The entire premise behind selling/buying bonds at a premium or discount is that people will be unwilling to pay face value for a bond that does not bear as much interest as the standard market rate of interest. (discount) Also, people are willing to pay more for a bond that yields more then the current market rate of interest. (premium) The discount will be the difference between the market value of the bond and the face value of the bond. This will either be stated or you will have to figure it out via the difference in interest rates. The journal entry to follow will also depend on if you are using straight line or effective interest methods of amortization. Straight Line Method: So if market interest rate was 12% and coupon rate was 10%, then there should be a 2% discount; [2,000,000 x .98 = 1,960,000] At sale date: State of California DB Cash 1,960,000 CR Bonds Payable 1,960,000. The discount [40,000] will now be amortized over the term that the bonds are outstanding [DB Bond Interest Expense CR Bonds Payable]; regular coupon interest payments will be recognized on their respective dates [CR Cash DB Interest Expense] Your amortization entry will be [40,000/10 = 4000] *Effective interest rate methods vary
Bond calculations of the discount rates?
1. 106.50= 10/(1 + r) + 10/(1 + r)^2 + 110/(1 + r)^3 r = 0.075 or 7.5%. I used a spreadsheet and trial and error to get the answer. There is a formula for an approximation of YTM. 2. 90(1 + r)^2= 100; r ≈ 0.0541 3. 80(1 + r)^3= 100; r ≈ 0.0772