Thread: MGT411 Money & Banking Assignment No. 02 Semester “Fall December 2011-2012

1. MGT411 Money & Banking Assignment No. 02 Semester “Fall December 2011-2012

“Money & Banking (MGT411)”

Assignment No. 02 Marks: 30

You have completed your graduation with specialization in Finance from a reputed institute of Pakistan. After completing your graduation you want to get job in a well reputed investment corporation. The company has given you an online test consisting of following financial data:

a) If a T-Bill having face value of Rs.100 along with 7% market interest rate and it is issued for only six months, what will be its present value? (5 Marks)

b) If a consol is purchased promising annual payment of Rs.8 then what will be the price of the consol at 6% interest rate? (5 Marks)

c) ABC Corporation has issued 9% coupon bond with face value of Rs.1,000 in order to finance a new line of product. If the maturity period of the bond is 05 years then what will be price of the bond at 8% interest rate? (5 Marks)

d) Suppose a 7% coupon bond with a face value of Rs.1,000 is currently selling at Rs.900. Find out yield to maturity of the bond? (5 Marks)

e) Consider a 6% coupon bond with face value of Rs.100 is currently selling at Rs. 98. Find out the current yield of the bond? (5 Marks)

f) Assume that you had purchased a 9%, 15 years coupon bond at price of Rs.950 having face value of Rs.1,000. But after one year, you need money therefore you decide to sell this bond at Rs.1,050 then how much holding period return will be gained on the bond? (5 Marks)

Note: You need to provide complete working along with formulae.

Important Tips

1. This Assignment can be best attempted from the knowledge acquired after watching video lecture no. 1 to lecture no.27 and reading handouts as well as recommended text book).

Schedule

Opening Date and Time December 23, 2011 At 12:00 A.M. (Mid-Night)

Due Date and Time December 29, 2011 At 11:59 P.M. (Mid-Night)

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4. Semester “Spring 2011”

“Money & Banking (MGT411)”

Assignment No. 02

Marks: 20

Idea solution

Question # 1 (Marks 8) A portfolio of Rs. 1,000 entitles the investor to receive dividend of Rs. 150 at the end of year 2011. Expected future sale price at the end of year is Rs. 998. If the investor plans to sell the stock in the market after holding it for one year, what will be the holding period return for one year on this portfolio(in terms of percentage)?

1 YEAR HOLDING RETUREN

=YEARLY COUPAN PAYMENT/PRICE PAID + CHANGE IN PRICE OF THE BOND/PRICE OF BOND

=\$150/\$1000 + (\$998-\$1000)/\$100

=.15+ (-.002)

=0.148=14.8 %

Holding period return=14.8%

Question # 2 (Marks 8) Find the variance and standard deviation for the stock of a newly listed public limited company purchased at Rs. 1,000. While making this investment there are 50% chances that the price of investment will fall to Rs. 900 and 50% chances are that it will rise to Rs. 1200 after six months.

Following step involve To calculate Variance

1. Expected Value

2. Subtract expected Value form each possible pay offs

3. Square each of results
4. Multiply each result time tis probability and adds up the result

Now first we calculate the Expected value

(900*1/2) + (1200*1/2) = 1050

Subtract expected value from each possible pay off

900-1050 = -150

1200-1050 = 150

Square each of result

(-150)2 = 22500

(150)2 = 22500

Multiply each result time its probability and adds up the result

½ * 22500 + ½ * 22500

22500

Variance = 22,500

Standard deviation=square rout of variance

S.D=150

Question # 3 (Marks 4) In stock market XYZ company is offering 16% annual return on bonds, however,Treasury Bills are providing 7% annual return. Calculate the risk premium if an investor invest in XYZ company

Risk premium = Risky return – Risk free return

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6. Assignment No. 2 (MGT411)
Semester Fall-2011

a) If a T-Bill having face value of Rs.100 along with 7% market interest rate and it is issued for only six months, what will be its present value?
Present value of six month treasury bill = 100/(1+0.07)^1/2
= 100/1.0344
= Rs.96.67

b) If a consol is purchased promising annual payment of Rs.8 then what will be the price of the consol at 6% interest rate?

Price of the consol = 8/(1+0.06)
= Rs.7.55

c) ABC Corporation has issued 9% coupon bond with face value of Rs. 1,000 in order to finance a new line of product. If the maturity period of the bond is 05 years then what will be price of the bond at 8% interest rate?

Price of the bond = coupon payment/(1+i)^n + face value/(1+i)^n
= 9/(1+0.08)^5 + 1000/(1+0.08)^5
= 9/1.4693 +1000/1.4693
= 6.1254 + 680.5962
= Rs.686.72

e) Consider a 6% coupon bond with face value of Rs. 100 is currently selling at
Rs. 98. Find out the current yield of the bond?

Current yield = 6 / 98
= 6.12%

f) Assume that you had purchased a 9%, 15 years coupon bond at price of Rs.950 having face value of Rs.1, 000. But after one year, you need money therefore you decide to sell this bond at Rs. 1,050 then how much holding period return will be gained on the bond?

Holding period return = yearly coupon payment/ price paid + change in the price of bond/ price of the bond
= 9/100 + 1050-1000/1000
= 0.94% + 0.05
= 0.94% + 5%