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Mr. A has following options for investment. Identify the major risks associated with following investment alternatives and give reason why a particular investment is more suitable for Mr. A. (All cases are independent of each other). Answer should be to the point. Avoid irrelevant details.
A. Mr. A has planned to hold a security for one year. He has the option to buy Treasury security that matures in one year as compare to another Treasury security that matures in 30 years.
B. Mr. A has planned to hold a security for ten years. He has the option to buy Treasury security that matures in ten years versus purchasing an AAA corporate security that matures in two years.
C. Mr. A has planned to hold a security for two years. He has the option to buy a zerocoupon bond that matures in one year as compare to another zero- coupon bond that matures in two years.
D. Mr. A has decided to hold the security for five years. He can opt to buy an AA sovereign bond (with dollar denominated cash flow payments) versus purchasing a US corporate bond with a B rating.
E. Mr. A has planned to hold a security for four years. He has the option to buy a less actively traded 10-year AA rated bond versus purchasing a 10-year AA rated bond that is actively traded.
GGG Company yesterday paid latest annual dividend of Rs. 1.25 a share and maintained its historic 7 percent annual rate of growth. You have planned to purchase the stock today because you believe that the dividend growth rate will increase to 8% for the next three years and the selling price of the stock will be Rs. 40 per share at the end of three years. How much should you be willing to pay for the GGG stock if you require a 12% return?

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Replies to This Discussion

what is aaa corporate bond??

aa rated bond

b rated bond??

The possibility that a firm will be unable to pay the principal and interest on a bond in
accordance with the bond indenture is known as the default risk. Standard & Poor's and
Moody's are the two leading advisor)' services reporting on the default risk of individual
bond issues. Standard & Poor's gives bonds a rating based on a scale of AAA (least risk) to
D (bonds in default). The ratings from AA to CCC may carry a plus or minus. Table 4-5
shows the complete set of ratings. An investment grade bond is rated BBB or higher; any
bond with a lower rating is known as a junk bond.
.Many fiduciaries are limited by law to
bonds that are investment grade.
Some bonds originate with an investment grade, but are later downgraded below BBB. Such
a bond is a fallen angel. Salomon Brothers uses the term zombie bond to refer to a highly
speculative bond, once thought long dead, that shows signs of life by a price run-up.
Standard & Poor's has a separate description for each of the ratings AAA, AA, A, and BBB.
Junk bonds, however, are all covered by a single definition, the salient portion of which
states that these bonds are regarded on balance, as predominately speculative with respect to
capacity to pay interest and repay principal in accordance with the terms of the obligation.

read it and clear your concepts 

Thanks dear,

can u plz tell me, what formula u used for calculation of question 2

po= Do(I+g) = D1

       K-g           K-g

Investors and those following the movement of interest rates look at the movement of Treasury yields as an indicator of things to come. Their rates are considered an important benchmark: Because Treasury securities are backed by the full faith and credit of the U.S. Treasury, they represent the rate at which investment is considered risk-free.

jo main solution share kya tha wo sahi tha :D :D


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