SEMESTER FALL 2012
INVESTMENT ANALYSIS & PORTFOLIO MANAGEMENT (FIN630)
ASSIGNMENT NO.02
DUE DATE: 31ST JANUARY 2013 MARKS: 25
Bond Valuation
LEARNING’S OBJECTIVES – This assignment will enhance the understanding of the student regarding Bond Valuation.
LEARNING OUTCOMES – After going through this activity, the students would be able to know about valuing different kinds of bonds available in the market.
ASSIGNMENT
Mr. Prudent has recently graduated from Business Finance School with major in portfolio management. In this regard, the area of his interest is “Fixed Securities”. Last Friday, on his 23rd birthday, his father gifted him a bank transfer of Rs. 30,000 to his name. Now, to his interest Mr. Prudent is planning to invest in the bonds of Limited Liability Company (LLC).
In 2008, LLC issued 8% bonds with face value of Rs. 1,000 to be redeemed in 2038. Moreover, these bonds bear the feature of being called upon by the company after the 5 years of their issuance at any time at a call price of Rs. 1,150 each. Bond Rating Agency (BRA) has rated this bond at A+.
State’s Central Bank has recently disclosed rate of inflation at 5% but an Independent Economist is of the view that this rate would certainly be increased by 1% at the end of this year as money supply is crossing over its demand. Mr. prudent, though interested in buying LLC’s bonds but also fears due to expected rise in the inflation which may cause damage to his investment. Another risk he feels is the maturity risk as the bond has still more than 2 decades to mature.
REQUIRED
While considering all of the above mentioned information, Mr. Prudent is encouraging you to answer the following questions to help him make buy decision:
a) What would be the bond’s value if Mr. Prudent desires a required return of 6%, 8%, and 10%? Would each of these computations carry any discount, premium or the face value? (6+3)
b) In which of the above cases, Mr. Prudent should buy this bond and why? (3)
c) Analyze the relationship between required rate of return and bond’s intrinsic value as per the following graph relating to a 6% bond issued by the company 7 years earlier keeping in view the maturity risk. (3)
d) What would be the capital gain or loss, if Mr. Prudent purchases the bond at call price while taking into account 1% increase in inflation and sells this bond after 5 years from now? (5)
e) What would be his yield to maturity on this bond at today’s purchase price of Rs. 980 and holding it till its maturity? (5)
IMPORTANT:
24 hours extra / grace period after the due date is usually available to overcome uploading difficulties. This extra time should only be used to meet the emergencies and above mentioned due dates should always be treated as final to avoid any inconvenience.
OTHER INSTRUCTIONS:
DEADLINE:
• Make sure to upload the solution file before the due date on VULMS.
• Any submission made via email after the due date will not be accepted.
FORMATTING GUIDELINES:
• Use the font style “Times New Roman” or “Arial” and font size “12”.
• It is advised to compose your document in MS-Word format.
• You may also compose your assignment in Open Office format.
• Use black and blue font colors only.
REFERENCING GUIDELINES:
• Use APA style for referencing and citation. For guidance search “APA reference style” in Google and read various website containing information for better understanding or visit http://linguistics.byu.edu/faculty/henrichsenl/apa/APA01.html
RULES FOR MARKING
Please note that your assignment will not be graded or graded as ZERO (0), if:
• It is submitted after the due date.
• The file you uploaded does not open or is corrupt.
• It is in any format other than MS-Word or Open Office; e.g. Excel, PowerPoint, PDF etc.
• It is cheated or copied from other students, internet, books, journals etc.
Note related to load shedding: Please be proactive
Dear students!
As you know that Post Mid-Term semester activities have been started and load shedding problem is also prevailing in our country now a days. Keeping in view the fact, you all are advised to post your activities as early as possible without waiting for the due date. For your convenience; activity schedule has already been uploaded on VULMS for the current semester, therefore no excuse will be entertained after due date of assignments, quizzes or GDBs.