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Semester “Fall 2011”

“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).

2. Video lectures can be downloaded for free from vu's Channel – YouTube.

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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a.
Present value of six month treasury bill = 100/(1+0.07)^1/2
= 100/1.0344
= Rs.96.67

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

c.
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.
Current yield = 6 / 98
= 6.12%
f.
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%
= 5.94%

 

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