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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?

Important Instructions:

Please read the following instructions carefully before attempting the assignment solution.

Deadline:

· Make sure that you upload the solution file before the due date. No

assignment will be accepted through e-mail once the solution has been

uploaded by the instructor.

Formatting guidelines:

· Use the font style “Times New Roman” and font size “12”.

· It is advised t compose your document in MS-Word 2003.

· Use black and blue font colors only.

Solution guidelines:

· Every student will work individually and has to write in the form of an

analytical assignment.

· Give the answer according to question, there will be negative marking

for irrelevant material.

· For acquiring the relevant knowledge don’t rely only on handouts but

watch the video lectures and use other reference books also.

· provide all calculation only answer will not be appreciated

Rules for Marking

Please note that your assignment will not be graded or graded as Zero (0) if:

· It has been submitted after due date

· The file you uploaded does not open or is corrupt

· It is in any format other than .doc (MS. Word)

· It is cheated or copied from other students, internet, books, journals etc…

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Replies to This Discussion

excuze me..i have solved my assignmnt,here students r providin diff solutions thats why m getting confused.ok????
ok.. to final mein lucky ka solution correct he hai na??
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
one more Idea solution file
see the attached file pls
Attachments:
SOL OF LUCKY IS CORRECT
Thanks sis... :D
on page 1 idea solution provided by lucky
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%

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