Accounting and Finance

This text discusses various topics related to Accounting and Finance including utility functions, mortgage payments, bond yields, and term structure of spot rates. It also provides calculations and explanations for each topic.

Running head: ACCOUNTING AND FINANCE
Accounting and Finance
Name of the Student:
Name of the University:
Authors Note:

1ACCOUNTING AND FINANCE
Answer 2:
Part a:
If Larry’s Utility function is
Then, considering that project A and B both cost $100 today however, with project A expected to
generate higher amount of $200 tomorrow compared to merely $100 expected to be generated by
project B Larry would invest in project A. The reason for such decision is that the project A is
expected generate $100 higher in return tomorrow compared to project B at same level of
investment (Sofat & Hiro, 2015).
Part b:
Assuming Mary’s utility function as following:
Still the preference of the investor would not change as the motive behind investment of an
investor would be to optimize the amount return on his or her investment thus, with the above
utility function Marry’s choice of investment would be project A as well as it expects to generate
$200 tomorrow compared to $100 that is expected to be generated by project B.
Hence, Marry would also invest in project A.
Part c:

2ACCOUNTING AND FINANCE
With net interest rate of 10%,
Marry would invest in project A to generate higher return in the future.
Marry would borrow (1000 – 700) = $300 at net interest rate of 10%.
To get optimal investment,
Optimal consumption would be Co = 43.57 and C1 = 58.23.
Part d:
If Bob has following utility function:
Then, he will invest as per the following assumption:

3ACCOUNTING AND FINANCE
Answer 3:
Part a:
Using the Canadian Mortgage Convention the monthly mortgage payment for the mortgage loan
of $800,000 from Bank of Montreal to buy house and a fixed rate of 6% a year with 5 year
closed is $5,929.71 per month (Bryce, 2017).
Part b:
For the 24th monthly payment out of the monthly mortgage payment of $5,929.71 principal
amount is $1,886.54 and $3,810.97 is for interests.
Part c:
Instead of monthly payment if the borrower changes the schedule of payment to weekly then the
weekly mortgage payment would be $1,362.24.
Part d:
Payment
sequence
Payments
($)
PV factors
1 50
0.6139
133
30.6956
627
2 50
0.5338
376
26.6918
806
0.4642 23.2103

4ACCOUNTING AND FINANCE
3 50 066 309
4 50
0.4036
579
20.1828
965
5 50
0.3510
069
17.5503
448
6 50
0.3052
234
15.2611
694
7 50
0.2654
116
13.2705
821
8 50
0.2307
927
11.5396
366
9 50
0.2006
893
10.0344
666
10 50
0.1745
125
8.7256
231
11 50
0.1517
500
7.5874
984
12 50
0.1319
565
6.5978
247
0.1147 5.7372

5ACCOUNTING AND FINANCE
13 50 448 388
14 50
0.0997
781
4.9889
033
15 50
0.0867
635
4.3381
768
16 50
0.0754
466
3.7723
277
17 50
0.0656
057
3.2802
849
18 50
0.0570
484
2.8524
217
19 50
0.0496
073
2.4803
667
20 50
0.0431
368
2.1568
406
21 50
0.0375
103
1.8755
136
22 50
0.0326
176
1.6308
813
0.0283 1.4181

6ACCOUNTING AND FINANCE
23 50 632 577
24 50
0.0246
636
1.2331
806
25 50
0.0214
466
1.0723
310
26 50
0.0186
492
0.9324
617
27 50
0.0162
167
0.8108
363
28 50
0.0141
015
0.7050
750
29 50
0.0122
622
0.6131
087
30 50
0.0106
628
0.5331
380
31 50
0.0092
720
0.4635
983
32 50
0.0080
626
0.4031
289
0.0070 0.3505

7ACCOUNTING AND FINANCE
33 50 109 469
34 50
0.0060
965
0.3048
234
35 50
0.0053
013
0.2650
638
36 50
0.0046
098
0.2304
903
37 50
0.0040
085
0.2004
263
38 50
0.0034
857
0.1742
838
39 50
0.0030
310
0.1515
511
40 50
0.0026
357
0.1317
836
41 50
0.0022
919
0.1145
944
42 50
0.0019
929
0.0996
473
0.0017 0.0866

8ACCOUNTING AND FINANCE
43 50 330 498
44 50
0.0015
070
0.0753
477
45 50
0.0013
104
0.0655
197
46 50
0.0011
395
0.0569
737
47 50
0.0009
908
0.0495
423
48 50
0.0008
616
0.0430
803
49 50
0.0007
492
0.0374
611
50 50
0.0006
515
0.0325
749
51 50
0.0005
665
0.0283
260
52 50
0.0004
926
0.0246
313
0.0004 0.0214

9ACCOUNTING AND FINANCE
53 50 284 185
54 50
0.0003
725
0.0186
248
55 50
0.0003
239
0.0161
955
56 50
0.0002
817
0.0140
830
57 50
0.0002
449
0.0122
461
58 50
0.0002
130
0.0106
488
59 50
0.0001
852
0.0092
598
60 50
0.0001
610
0.0080
520
61 50
0.0001
400
0.0070
017
62 50
0.0001
218
0.0060
885
0.0001 0.0052

10ACCOUNTING AND FINANCE
63 50 059 943
64 50
0.0000
921
0.0046
038
65 50
0.0000
801
0.0040
033
66 50
0.0000
696
0.0034
811
67 50
0.0000
605
0.0030
270
68 50
0.0000
526
0.0026
322
69 50
0.0000
458
0.0022
889
70 50
0.0000
398
0.0019
903
71 50
0.0000
346
0.0017
307
72 50
0.0000
301
0.0015
050
0.0000 0.0013

11ACCOUNTING AND FINANCE
73 50 262 087
74 50
0.0000
228
0.0011
380
75 50
0.0000
198
0.0009
895
76 50
0.0000
172
0.0008
605
77 50
0.0000
150
0.0007
482
78 50
0.0000
130
0.0006
506
79 50
0.0000
113
0.0005
658
80 50
0.0000
098
0.0004
920
81 50
0.0000
086
0.0004
278
82 50
0.0000
074
0.0003
720
0.0000 0.0003

12ACCOUNTING AND FINANCE
83 50 065 235
84 50
0.0000
056
0.0002
813
85 50
0.0000
049
0.0002
446
86 50
0.0000
043
0.0002
127
87 50
0.0000
037
0.0001
850
88 50
0.0000
032
0.0001
608
89 50
0.0000
028
0.0001
399
90 50
0.0000
024
0.0001
216
91 50
0.0000
021
0.0001
057
92 50
0.0000
018
0.0000
920
0.0000 0.0000

13ACCOUNTING AND FINANCE
93 50 016 800
94 50
0.0000
014
0.0000
695
95 50
0.0000
012
0.0000
605
96 50
0.0000
011
0.0000
526
97 50
0.0000
009
0.0000
457
98 50
0.0000
008
0.0000
398
99 50
0.0000
007
0.0000
346
100 50
0.0000
006
0.0000
301
Present value of the cash flows 23
5.33
Thus, present value of these cash flows is $235.35.

14ACCOUNTING AND FINANCE
Answer 4:
Part a:
Bond 1 yield (%) = (1000 -975) x 100 / 975 = 2.56410%
Yield
(%)
Bond 1 2.564103
Approximately 2.56%
Bond 2 coupon rate is 8%
Bond 2
Price 1018.86
Yield (1018.86 x
4% c 2)
81.5088 40.7544
Coupon rate 8
Bond 3 price would be equal to its face value, i.e. $1,000 because the yield and coupon rate of
the bond are equal. Hence, the price of the bond would be $1,000, i.e. exactly the face value of
the bond.
Part b:

15ACCOUNTING AND FINANCE
The term structure of spot rates for 1 year to 3 years maturity is higher spot rate with increase in
maturity period as per the information of the bond here.
Part c:
Particulars Amoun
t ($)
Price of the bond 1,040.
00
Face value 1,000.
00
Annual interest @6% 60.
00
Maturity period 2 years
Total amount of interest earned (60 x 2) 120.
00
Face value at the time redemption 1,000.
00
Total cash inflow 1,120.
00
Less: Cash outflow at the time of investment 1,040.

16ACCOUNTING AND FINANCE
00
Profit over 2 years 80.
00
Part d:
Particulars Amoun
t ($)
Investment 1,000.
00
Add: Interest (1000 x 4%) 40.
00
Total investment 1,040.
00
Face value 1,000.
00
Coupon (1000 x 5%) 50.
00
Total inflow 1,050.

17ACCOUNTING AND FINANCE
00
Return (1050 -1040) 10.
00
Hence, holding period return is $10 for Bond 3.
Part e:
True, in case no opportunity of arbitrage the zero coupon bond rate would never trade at
premium as without any interest there would be no possibility of earning any return on zero
coupon bond without the arbitrage opportunity. Hence, zero coupon bond without arbitrage
opportunity would never trade at a premium.
Answer 5:
Part a:
Term structure of sport rates for 1 year to 4 year maturity is calculated in the table below:
Forward
rates
f1 2%
f2 2.5%
f3 3%

18ACCOUNTING AND FINANCE
f4 4%
Term structure 2.875%
Part b:
Market rate of interest 6% has been assumed.
Year Coupon + face value PV factor @6% pa. Present
value
($)
1
.00
80.00 0.9434 75.
47
2
.00
80.00 0.8900 71.
20
3
.00
1,080.00 0.8396 906.
79
Price of the bond 1,053.
46
Part c:
No arbitrage annualized forward rate that can be locked in today for the loan is 9,325.00

19ACCOUNTING AND FINANCE
Part d:
Market value of forward loan with r1 = 3% is $9,716.98
Year Market
interest
rate 6%
pa.
Spot rate @3%
1 0.9433962 0.970874 $9716.981
Market value of forward loan with r2 = 3.5% is $9,764.15.
Year Market interest rate 6% pa. Spot rate @3.5%
1 0.9433962 0.966184 9764.151
Market value of forward loan with r2 = 3.75% is $9,787.74.
Year Market interest rate 6% pa. Spot rate @3.75%
1 0.9433962 0.963855 9787.736
Answer 6:
Part a:

20ACCOUNTING AND FINANCE
EPS year 0 20
EPS year 1 25
EPS year 2 30
EPS year 3 34.5
EPS year 4 37.95
Dividend in year 4 18.975
Indefinite growth rate 10%
Discount rate 15%
Share price (18.975 / 15% -10%) $379.5
Thus, estimated share price is $379.50.
Part b:
The stock price in such case would be,
EPS year 0 20
Share price (10 / 15% -10%) $200
Part c:

21ACCOUNTING AND FINANCE
The steady-state earnings growth rate of Cindy is 18%.

22ACCOUNTING AND FINANCE
References:
Bryce, H. J. (2017). Financial and strategic management for nonprofit organizations. Walter de
Gruyter GmbH & Co KG.
Sofat, R., & Hiro, P. (2015). Strategic financial management. PHI Learning Pvt. Ltd..