MGT201 Assignment # 2 Solution 1 July 2010

Question 01

Po* = DIV1 / [ (rRF + (rM - rRF ) βA ) - g]
Where
Po*=80
DIV1= 5
g= 7%
rRF = 6%
rM = 10%
βA ) ?

Po* = DIV1 / [ (rRF + (rM - rRF ) βA ) - g]
80 = 5 / [ (6% + (10% - 6% ) BA ) -7%]

Now put the values and get answer which is = βA 1.8125


Question 02.


FORMULA
Bond Price = PV = C1/ (1+rD) + C2/ (1+rD) t2+ C3 / (1+rD) t3 + ……. +C/ (1+rD) n + PAR / (1+rD)n

A)

Bond Price = PV = C1/ (1+rD) + C2/ (1+rD) t2+ C3 / (1+rD) t3 + PAR / (1+rD) n3

Pv = bound value
C= coupon payment Pa = 2000*10.100= 200
rD= required rate of return = 14%=0.14
PAR = par value or face value= 2000
Maturity period
Bound A = t 3 ,n3

Bond Price = PV = C1/ (1+rD) + C2/ (1+rD) t2+ C3 / (1+rD) t3 + PAR / (1+rD) n3

= 200/ (1.14)+200/(1.14)t2 + 200/(1.14)t3+2000/(1.14)n3

= 175.43 + 153.89 +134.99 + 1349.98

= 1814.29 OR 1814

Bond Price = PV = C1/ (1+rD) + C2/ (1+rD) t2+ C3 / (1+rD)t3+C4(1+rD)t4+C5(1+rD)t5+PAR/(1+rD)n5

Pv = bound value
C= coupon payment Pa = 2000*10.100= 200
rD= required rate of return = 14%=0.14
PAR = par value or face value= 2000
Maturity period
Bound B = t 5, n5

B)

Bond Price = PV = C1/ (1+rD) + C2/ (1+rD) t2+ C3 / (1+rD)t3+C4(1+rD)t4+C5(1+rD)t5+PAR/(1+rD)n5

= 200/ (1+.14)+200/(1+.14)t2 + 200/(1+.14)t3+200(1+.14)t4+200/(1+.14)t5+ 2000/(1+.14)n5

= 200/(1.14) + 200/(1.14)t2+200/(1.14)t3+200(1.14)t4+200(1.14)t5(1.14)t5+2000/(1.14)n5
=175.44 + 154 + 135 + 118.42 + 104 + 1039

= 1725

(Part C)

Bond A is perfect decision having the shorter maturity period because of market interest risk diversify the portfolio as it can be spread and chose the bound with shorter duration