Introduction to Finance

5. 
Challenge Problem
(Note: This problem requires access to a 
spreadsheet software package or a fi nancial calculator that can 
handle uneven cash fl ows.) Following are the cash fl ows for three 
investments (originally presented in end-of-chapter problem 25) that 
actually occur at the beginning of each year rather than at the end of 
each year.
Year
Investment 
Stable
Investment 
Declining
Investment 
Growing
1
$20,000
$35,000
$10,000
2
20,000
30,000
15,000
3
20,000
20,000
20,000
4
20,000
5,000
30,000
5
20,000
0
50,000
a. 
Find the present values at the end of time period zero for each of 
these three investments if the discount rate is 15 percent.
b. 
Find the future values of these three investments at the end of 
year fi ve if the compound interest rate is 12.5 percent. 
c. 
Assume that the present value for each of the three investments is 
$75,000. What is the annual interest rate (%i) for each investment?
d. 
Assume that the future value for each of the three investments is 
$150,000. What is the annual interest rate (%i) for each investment? 
(Note: (c) and (d) are independent of each other.)

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252
CHAPTER 
10
Bonds and Stocks: 
Characteristics and Valuations
L E A R N I N G O B J E C T I V E S
After studying this chapter, you should be able to do the following:
LO 10.1 
Identify the major sources of external long-term fi nancing for corporations.
LO 10.2 
Describe the global market for bonds, the role of bond covenants, and bond ratings.