An investor borrows a principal of £1,000,000 and agrees to an interest-only repayment at a rate of 5% p.a., in equal quarterly installments, paid in arrears for 10 years. After 10 years the principal is paid back with a lump payment. The investor uses part of the principal to buy £200,000 nominal of 10-year government bonds, paying semi-annual coupons at a rate of 4% p.a. and producing a yield of 3.5% p.a. effective. Bonds are redeemed at par after 10 years. The remaining portion of the principal (denoted by P) is used to purchase properties that produce annual rental income at a rate of 4% of their initial value P for the first 5 years and, subsequently, at a rate of 5% of their initial value P. Rent is payable monthly in advance. (a) Evaluate the present value at time zero of the total liability. Let ir = 4% p.a. be the annual effective rate applied to liabilities. (b) Compute the present value at time zero of the portion of principal invected in bends and deduce the invectment in pronertios P

An investor borrows a principal of £1,000,000 and agrees to an interest-only repayment at a rate of 5% p.a., in equal quarterly installments, paid in arrears for 10 years. After 10 years the principal is paid back with a lump payment. The investor uses part of the principal to buy £200,000 nominal of 10-year government bonds, paying semi-annual coupons at a rate of 4% p.a. and producing a yield of 3.5% p.a. effective. Bonds are redeemed at par after 10 years. The remaining portion of the principal (denoted by P) is used to purchase properties that produce annual rental income at a rate of 4% of their initial value P for the first 5 years and, subsequently, at a rate of 5% of their initial value P. Rent is payable monthly in advance. (a) Evaluate the present value at time zero of the total liability. Let ir = 4% p.a. be the annual effective rate applied to liabilities. (b) Compute the present value at time zero of the portion of principal invected in bends and deduce the invectment in pronertios P

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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Similar questions

A bank holds a 10-year $2 million face value bond with a duration of 8 years. The current price = $950,000. Interest rates are expected to increase from 9% to 11% over next 3 months. Demonstrate how the bank can use a forward contract to hedge the interest rate risk.
2. A client has the following obligations: $20,000 maturing in 2 years with interest at 5% semiannually, $140,000 with interest at 10% convertible quarterly maturing in 5 years, considering an effective rate of 8%, with what payments? equal at the end of 3 and 6 years respectively, is it possible to replace the debts incurred?
Ten bonds are purchased for $8,856.11 and are kept for 5 years. The bond coupon rate is 9% per year, payable annually. Immediately following the owner's receipt of the last coupon payment, the owner sells each bond for $50 less than its par value (price discount). The owner will invest in the bonds if the effective annual yield is at least 11%. What is the face value of the the ten bonds? 9594.84
$52,000 is invested in a 5-year fixed interest bond paying 5.5% per year. If interest is reinvested in the account, how much will the bond be worth in 5 years? Round your answer to the nearest dollar.
Suppose Roberto is considering a 12-year bond with a face value of $2,000 and a rate of 8% payable semiannually. Calculate the payment Roberto would have to make if an "effective" annual interest rate of 8.2% were required.
You can invest SGD 100,000 in fixed deposit with a bank. The term of the deposit is 6 years, and the deposit rate quoted is 3.6%.Calculate the amount (round to 2 decimal places) you will have in 6 years, upon maturity of this fixed deposit, if the 3.6% is an APR but compounded quarterly
A loan is to be repaid by an annuity payable monthly in arrears over a 5-year period. The annuity starts at a rate of £200 per month and increases each month by £5. Repayments are calculated using a rate of interest of 8% per annum effective. (i) Calculate the amount of the original loan to the nearest £. (ii) (iii) Calculate the capital outstanding at the end of the first year (after the payment due has been made) to the nearest £0.01. Hence, or otherwise, calculate the capital and interest components of the 13th and 14th payments.
A fixed interest security was issued on 1 January in a given year. The security pays half-yearly coupons of 4% per annum. The security is redeemable at 110 % 20 years after issue. An investor who pays both income tax and capital gains tax at a rate of 25% buys the security on the date of issue. Income tax is paid on coupons at the end of the calendar year in which the coupon is received. Capital gains tax is paid immediately on sale or redemption. (i) Calculate the price paid by the investor to give a net rate of return of 6% per annum effective. (ii) Calculate the duration of the net payments from the fixed interest security for an investor who pays income tax as described above but who does not pay capital gains tax, at a rate of interest of 6% per annum effective.
You have just purchased a municipal bond with a $10,000 par value for $9,500. You purchased it immediately after the previous owner received a semiannual interest payment. The bond rate is 6.6% per year payable semiannually. You plan to hold the bond for 3 years, selling the bond immediately after you receive the interest payment. If your desired nominal yield is 4% per year compounded semiannually, what will be your minimum selling price for the bond?
What is the present worth of a $25,000 bond that was purchased for $23,750 and has an interest of 10% per year, payable semiannually? The bond matures in 15 years. The interest rate in the marketplace is 8% per year, compounded quarterly.
You have just purchased a municipal bond with a $10,000 par value for $9,500. You purchased it immediately after the previous owner received a semiannual interest payment. The bond rate is 6.6% per year payable semiannually. You plan to hold the bond for 3 years, selling the bond immediately after you receive the interest payment. If your desired nominal yield is 9% per year compounded semiannually, what will be your minimum selling price for the bond? $ 13450 Carry all interim calculations to 5 decimal places and then round your final answer to the nearest dollar. The tolerance is ±5.
Company A and B have been offered the following rates per annum on a £50 million, 10 - year loan. Company A borrows at a fixed rate of 6% and floating rate of (LIBOR + 0.4)%. Company B borrows at a fixed rate of 7% and a floating rate of (LIBOR + 0.6)%. a) Company A requires a floating rate loan, whereas company B requires a fixed rate loan. In which market does company A have a comparative advantage? Design at least two different swaps that will give a bank, acting as an intermediary 0.6% p.a. and that will appear equally attractive to both companies. Explain how to achieve this, using diagrams and text. b) Design a Swap that is the most beneficial to company A. Explain using text and diagram. c) Suppose that company A has an asset worth £10 million yielding an interest of 7%. Suppose that A is a company based in Japan. Explain how it can use a currency swap to transform the asset to an asset paying Yen (currency in Japan).

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