Pdv Company Marketing

2.  For this problem, I would like you to use an online calculator to see how PDV works. Go to: http://www.moneychimp.com/calculator/present_value_calculator.htm

Choose a likely amount you will pay at some time in the future. Choose a reasonable discount rate. Then record the PDV. Then, change the discount rate to a higher number and record the PDV.

1. What payment did you choose? Why? Why might you want to use PDV to analyze this payment level?

I chose semiannual payments because most bonds pay interest semiannually until maturity, meaning bond holders will receive two interest payments each year.

PDV will give me the combination of time periods and discount rates that will help me determine how much money currently I will have. A sensitivity analysis of time period and discount rate is given.

[pic 1]

1. Explain why your original discount rate was reasonable.

The current 5 year municipal bonds rate in USA are approx. 1.1%. So since it is a more risky asset we added 0.5% as the risk premium and took it as 1.6%

1. Explain why the PDV changed when you lowered the discount rate.

Sensitivity of PDV with discount rate is shown as below:

[pic 2]

Thus we can see with increasing rates the PDV decrease. This is because a higher interest rate means you would have to set less aside today to earn a specified amount in the future.

Think about this. You owe someone 100 dollars payable in 1 year. You keep the money in the bank and after 1 year you want to pay this person back. The bank pays an interest rate on your deposits. So, lets say the interest rate is 5%. The present value of your future payment is P=100/1.05 = 95.23. So all you need to deposit in the bank is 95.23 so that after a year, you'll have the full 100 to pay back that person.

So if the interest rate increases, you'll have to deposit less. So the corresponding present value decreases as well.

1. Find the stock price today and yesterday for a corporation beginning with the first letter of your first or last name. Record these stock prices and calculate the percent change.

Let the company be Amazon

Stock price today: $761.01 ; Stock price yesterday: $771.49

Average percentage change : -1.36%

Lognormal percentage change: -1.37%

Then find the DJIA (Dow Jones Industrial Average) for these same two days. Calculate the percent change in the DJIA.

DJIA today: 18066.75; DJIA yesterday: 18325.07

Average percentage change : -1.41%

Lognormal percentage change: -1.42%

Why is this comparison important?

Stock prices and housing prices both reflect the market value of an asset. The comparison gives an indication of how the stock performed compared to the market. The regression analysis of which can give the beta coefficient of the stock which is useful in determining the rates of return for the stock and also predicting future returns. So a stock with beta greater than one moves more than the market and stock with beta value less than one moves less than the market. Here for amazon sine the percentage change is less than market it must have a beta less than one.

4.  Choose a country of interest to you at the following site and find out what has happened to its currency value in the last five years.  http://www.oanda.com/convert/fxhistory   What is the trend in the last five years? Has the currency appreciated or depreciated?

I choose Indian rupee. Trend for the last 5 years:

[pic 3]

We see that the currency has depreciated over 5 years.

Then go to the CIA Factbook and find out what has happened to this country’s economy in recent years https://www.cia.gov/library/publications/the-world-factbook/rankorder/rankorderguide.html

...