MGT411 Assignment#1 Solution & Discussion Due Date:10-11-2010

[Mahdi]

Semester “Fall 2010”

“Money & Banking (MGT411)”

Assignment No. 01 Marks: 15

Important Tips

1. This Assignment can be best attempted from the knowledge acquired after

watching video lecture no. 1 to lecture no 13 and reading handouts as well as

recommended text book).

2. Video lectures can be downloaded for free from www.youtube.com/vu .

Schedule

Opening Date and Time November 04 , 2010 At 12:01 A.M. (Mid-Night)

Due Date and Time November 10 , 2010 At 11:59 P.M. (Mid-Night)

Note: Only in the case of Assignment, 24 Hrs extra / grace period after the above mentioned

due date is usually available to overcome uploading difficulties which may be faced by the

students on last date. 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.

Question no 1

Part (a)

On 01 January 2010 JS Group want to issue bonds in the capital market having

face value Rs.1, 000 with coupon rate of 10% (semi annually and 15 years

maturity). Investor required rate of return in this scenario is 12%.

You are being the student of finance know the worth of fundamental methods of

valuation; therefore you are required to calculate the present value of the bond by

utilizing the fundamental methods.

Part (b)

The bond of JS Group is traded in the Karachi Stock exchange for Rs.950. The

par value of the bond is Rs.1, 000. The coupon rate is fixed at 12 % paid annually.

This bond will be matured after 03 year. What will be (YTM) of this bond?

Part (c)

EFU, an insurance company, wants to plan a new service to its policy holders.

During the meeting of executives, CEO offered a plan of house insurance. The

summary of estimated cash flows which were discussed in that meeting is:

· This project will need Rs.05 million as initial investment

· In the first year company will receive Rs.02 million as premium from the

policy holders.

· In second year, company expect to receive Rs.2.5 millions as premium

· In third year company estimated that it will have to receive only Rs. 01

million because there will be a earth quack in that period, as probability of

having earth quack is more than 80% as predicted by geologists.

· In the fourth year the company estimated to get Rs.1.5 million after clearing

the insurance claims of the policy holders.

· In fifth year they expect to receive only Rs. 0.5 million

Calculate the IRR of above mentioned plan by trail and error method?

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[SAMAR]

excuze me..i have solved my assignmnt,here students r providin diff solutions thats why m getting confused.ok????

[M!R]

ok.. to final mein lucky ka solution correct he hai na??

[SAMAR]

yes bro,he used diffrent formula,and also wrong sol of sir tarik,thats why i got confused,i used the formulas given in financial managment book and lucky's answrs r correct

[+ M.Tariq Malik]

one more Idea solution file
see the attached file pls

[SAMAR]

SOL OF LUCKY IS CORRECT

[M!R]

Thanks sis... :D

[SAMAR]

on page 1 idea solution provided by lucky

[+ M.Tariq Malik]

To solve or calculate the future value

FV = PV *(1+(i/n))^n
=1000*(1+(.10/2))^30
1000*(1+1.05) ^30

FV = Rs. 4321.942

Now calculate present formula
PV = fv/((1+(i/n))^n
PV = 4321.942/(1+.12/2)^30
PV = 4321.942/ (1+.06) ^30
PV = Rs.752.49

Part B

C= Coupon rate = 12%
Coupon payment = 950*(1.12) = 1120

Where
I= annual coupon interest payment
That will be
I =coupon rate*face value
=12/100*1000
=120
=Rs.120
And
V = par value
=1000
And
P = price of the bond
= Rs.950
T=number of time period involved =3

By putting the values
YTM = [120+(1000+950)/3]/(1000+950)/2
YTM = [120+50/3]/1950/2
YTM = 0.14017

Part C

Initial = 5million

Cf1 = 2million
Cf2 = 2.5m
Cf 3= 1m
Cf4 = 1.5m
Cf5 = .5m


By using the formula of present value

PV = CF1/(1+IRR)1+ CF1/(1+IRR)^2+ CF1/(1+IRR)^3+ CF1/(1+IRR)^4+ CF1/(1+IRR)^5

Using trile and error method
Consider IRR = 20%

By putting the values

5 = 2/(1+.2)^1+2.5/(1+0.2)^2+1/(1+0.2)^3+1.5/(1+.0.2)^4+0.5/(1+0.2)
5 = 1.667+1.74+0.58+.73+0.21
5 = 4.90

it means that IRR will be a slightly low
now put the IRR=18%

5 = 2/(1+.18)^1+2.5/(1+0.18)^2+1/(1+0.18)^3+1.5/(1+.0.18)^4+0.5/(1+0.18)
5 =
5 = 1.69+1.79+.61+0.78+0.22
5 = 5.09

the IRR will be between 18% and 20%