Semester “Fall 2010” “Money & Banking (MGT411)” Assignment No. 01 MGT411 MBF by Umair

8/8/2019 Semester Fall 2010 Money & Banking (MGT411) Assignment No. 01 MGT411 MBF by Umair

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Semester Fall 2010Money & Banking (MGT411)

Assignment No. 01

Marks: 15Question no 1

Part (a)On 01 January 2010 JS Group want to issue bonds in the capitalmarket havingface value Rs.1, 000 with coupon rate of 10% (semi annually and 15yearsmaturity). Investor required rate of return in this scenario is 12%.You are being the student of finance know the worth of fundamental

methods ofvaluation; therefore you are required to calculate the present value ofthe bond by

utilizing the fundamental methods.Part (b)The bond of JS Group is traded in the Karachi Stock exchange forRs.950. Thepar 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 thisbond?

Part (c)EFU, an insurance company, wants to plan a new service to its policyholders.During the meeting of executives, CEO offered a plan of houseinsurance. Thesummary of estimated cash flows which were discussed in thatmeeting is:

This project will need Rs.05 million as initial investment In the first year company will receive Rs.02 million as premium fromthepolicy holders.

In second year, company expect to receive Rs.2.5 millions aspremium

In third year company estimated that it will have to receive only Rs.01million because there will be a earth quack in that period, asprobability ofhaving earth quack is more than 80% as predicted by geologists.


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In the fourth year the company estimated to get Rs.1.5 million afterclearingthe insurance claims of the policy holders.

In fifth year they expect to receive only Rs. 0.5 millionCalculate the IRR of above mentioned plan by trail and error method?


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Solution;

PART A.FOR CALCULATING A PRESENT VALUE OF A BOND

2.................

(1 ) (1 ) (1 ) (1 )n nd d d d

C C C M Pv

r r r r = + + +

+ + + +

( ) ( )

( )

( )

1 1 1

11

1

1

n

t n

td d

n

d

n

d d

C MPv

r r

r M Pv C

r r

=

= ++ +

+ = + +

WhereC=interest paid each year =coupon rate*face value

C=10%*1000

C=100AND for semiannually it will be INT=100/2=Rs.50

And n=number of PERIODDSHere n=15 years and for semiannually it will be n=15*2=30

Rd=rate of return that is =12%

And for semiannually it will be =12/2=6%And M= face or par value

( )

( )

11

1

1

n

d

n

d d

r M Pv C

r r

+ = + +

By putting the Values

( )

( )

30

30

11

1 0.06 100050

0.06 1 0.06Pv

+ = + +


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11

10005.7434500.06 5.7434

Pv

= +

0.825 100050

0.06 5.7434Pv

= +

862.35Pv =

.862.35 Pv Rs=

So the present value of BOND will be RS.862.35

PART.B.

For calculating YTM ,USING APPROXIMATION FORMULA .

( )

( )

/

/ 2

I V P T YTM

V P

+ =

+

WhereI= annual coupon interest payment

That will be

=coupon rate*face value=12/100*1000

=120

=Rs.120And

V=par value

=1000

And P=price of the bond

=Rs.950

T=number of time period involved=3

By putting the values


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( )

( )

120 1000 950 / 3

1000 950 / 2YTM

+ =

+

( )( )

120 50 / 3

1950 / 2YTM +=

0.14017YTM == 14..017 %

C )

Cash flow for EFU, INSURANCE COMPANY

By using the formula of present value

4 51 2 3

1 2 3

1 14 5

1 1

1 1 1

1 1 1CF CF

IRR IRR PV CF CF CF

IRR IRR IRR

+ + + + = + +

+ + +USING TRILE AND ERROR METHOD

LET SUPPOSE we consider IRR=20%

BY PUUTING THE VALUES

4 51 2 3

1 11.5 0.5

1 0.2 1 0.2

5 1.166666667 1.73611111 0.57870370 0.72337963 0.20093879

5 4.905799

1 1 15 2 2.5 1

1 0.2 1 0.2 1 0.2

+ + + + = + + + +=

= + ++ + +

It means that IRR WILL BE a slightly low

0 1 2 3 4 5

- 5 million +2million +2.5 +1 million +1.5 + 0.5


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Now put the IRR=18%

4 51 2 3

1 11.5 0.5

1 0.18 1 0.18

5 1.69491525 1.79546107 0.60863087 0.77368331 0.218554615 5.09124511

1 1 15 2 2.5 1

1 0.18 1 0.18 1 0.18

+ + + +

= + + + + +=

= + ++ + +

It means that IRR will be between 18 and 20%Now put the value of IRR=18.90%

( )

4 51 2 3

1 11.5 0.5

1 0.189 1 0.189

5 1.68208579 1.76838287 0.59491434 0.75052271 0.21040726

5 5.00

1 1 15 2 2.5 1

1 0.189 1 0.189 1 0.189

APPROXIMATLY

+ + + + = + + + +

=

= + ++ + +

SO THE IRR will be 18.90%

Semester “Fall 2010” “Money & Banking (MGT411)” Assignment No. 01 MGT411 MBF by Umair

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