The Time Value of Money & Bond ValuationYou have just been employed as an investment analyst in an investment bank. You took over from someone who left with a number of issues that need answers. The issues are itemized below:a) A client just deposited ¢7,000,000 in one of your investment funds which is currently earning 8% return. The bank has advised the client to deposit an additional ¢4,000,000 at the end of each of the next three years. The client would like to know how much the total amount in this investment will be in three years’ time. b) A client has been offered an investment product which requires that he pays ¢200,000 in one year, ¢400,000 the next year, ¢600,000 the year after, and ¢800,000 at the end of the following year. The client could have earned 12% on similar investments being offered on the market but has decided to take your firm’s offer. How much is this investment worth today assuming the client proceeds to invest? c) Agrippa holds two bonds; a 30-year coupon bond with a face value of ¢30million paying annual coupon of 8% and a 30-year zero coupon bond with a face value of ¢30million. (i) Suppose interest rate increase from 8% to 9%, which bond will suffer the greatest decline in price; the 30-year bond paying annual coupons of 8% or a 30-year zero coupon bonds? (ii) Explain intuitively why you think the bond you have selected in (i) has high interest rate risk even though it has the same maturity as the bond? d) Mansa offers a 10% coupon bond with a face value of ¢1,000 which pays coupon semiannually and has a yield to maturity of 7%. The bond matures in 10 years. What is the market price of this bond?
The Time Value of Money & Bond ValuationYou have just been employed as an investment analyst in an investment bank. You took over from someone who left with a number of issues that need answers. The issues are itemized below:a) A client just deposited ¢7,000,000 in one of your investment funds which is currently earning 8% return. The bank has advised the client to deposit an additional ¢4,000,000 at the end of each of the next three years. The client would like to know how much the total amount in this investment will be in three years’ time. b) A client has been offered an investment product which requires that he pays ¢200,000 in one year, ¢400,000 the next year, ¢600,000 the year after, and ¢800,000 at the end of the following year. The client could have earned 12% on similar investments being offered on the market but has decided to take your firm’s offer. How much is this investment worth today assuming the client proceeds to invest? c) Agrippa holds two bonds; a 30-year coupon bond with a face value of ¢30million paying annual coupon of 8% and a 30-year zero coupon bond with a face value of ¢30million. (i) Suppose interest rate increase from 8% to 9%, which bond will suffer the greatest decline in price; the 30-year bond paying annual coupons of 8% or a 30-year zero coupon bonds? (ii) Explain intuitively why you think the bond you have selected in (i) has high interest rate risk even though it has the same maturity as the bond? d) Mansa offers a 10% coupon bond with a face value of ¢1,000 which pays coupon semiannually and has a yield to maturity of 7%. The bond matures in 10 years. What is the market price of this bond?
Chapter1: Introduction To Finance For Entrepreneurs
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The Time Value of Money & Bond Valuation
You have just been employed as an investment analyst in an investment bank. You took over from someone who left with a number of issues that need answers. The issues are itemized below:
a) A client just deposited ¢7,000,000 in one of your investment funds which is currently earning 8% return. The bank has advised the client to deposit an additional ¢4,000,000 at the end of each of the next three years. The client would like to know how much the total amount in this investment will be in three years’ time.
b) A client has been offered an investment product which requires that he pays ¢200,000 in one year, ¢400,000 the next year, ¢600,000 the year after, and ¢800,000 at the end of the following year. The client could have earned 12% on similar investments being offered on the market but has decided to take your firm’s offer. How much is this investment worth today assuming the client proceeds to invest?
c) Agrippa holds two bonds; a 30-year coupon bond with a face value of ¢30million paying annual coupon of 8% and a 30-year zero coupon bond with a face value of ¢30million.
(i) Suppose interest rate increase from 8% to 9%, which bond will suffer the greatest decline in price; the 30-year bond paying annual coupons of 8% or a 30-year zero coupon bonds?
(ii) Explain intuitively why you think the bond you have selected in (i) has high interest rate risk even though it has the same maturity as the bond?
d) Mansa offers a 10% coupon bond with a face value of ¢1,000 which pays coupon semiannually and has a yield to maturity of 7%. The bond matures in 10 years. What is the market price of this bond?
You have just been employed as an investment analyst in an investment bank. You took over from someone who left with a number of issues that need answers. The issues are itemized below:
a) A client just deposited ¢7,000,000 in one of your investment funds which is currently earning 8% return. The bank has advised the client to deposit an additional ¢4,000,000 at the end of each of the next three years. The client would like to know how much the total amount in this investment will be in three years’ time.
b) A client has been offered an investment product which requires that he pays ¢200,000 in one year, ¢400,000 the next year, ¢600,000 the year after, and ¢800,000 at the end of the following year. The client could have earned 12% on similar investments being offered on the market but has decided to take your firm’s offer. How much is this investment worth today assuming the client proceeds to invest?
c) Agrippa holds two bonds; a 30-year coupon bond with a face value of ¢30million paying annual coupon of 8% and a 30-year zero coupon bond with a face value of ¢30million.
(i) Suppose interest rate increase from 8% to 9%, which bond will suffer the greatest decline in price; the 30-year bond paying annual coupons of 8% or a 30-year zero coupon bonds?
(ii) Explain intuitively why you think the bond you have selected in (i) has high interest rate risk even though it has the same maturity as the bond?
d) Mansa offers a 10% coupon bond with a face value of ¢1,000 which pays coupon semiannually and has a yield to maturity of 7%. The bond matures in 10 years. What is the market price of this bond?
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