MGT201 current mid term paper 17 May 2011

[Vuhelper]

Question No: 32 ( Marks: 5 )
Suppose you approach a bank for getting loan. And the bank offers to lend you Rs.1,
000,000 and you sign a bond paper. The bank asks you to issue a bond in their favor on
the following terms required by the bank: Par Value = Rs 1, 000,000, Maturity = 3 years
Coupon Rate = 15% p.a, Security = Machinery
You are required to calculate the cash flow of the bank which you will pay every
month as well as the present value of this option.
Data:
Par Value = Rs 1, 000,000
Maturity = 3 years
Coupon Rate = 15% p.a,
Security = Machinery
Solution:
CF = Cash Flow = Coupon Value = Coupon Rate x Par Value
CF = 15% x 1,000,000
CF = 150000
Assume that rD = 10%
PV = CF1/(1+rD/12)12+CFn/(1+rD/12)2x12 +..+CFn/ (1+rD/12) n +PAR/ (1+rD) n
PV = 150000/ (1 + 0.10/12)12 + 150000/ (1 + 0.10/12)2x12 + 150000/ (1 + 0.10/12)3x12
+ 1000000/(1 + 0.10/12)3x12
PV = 150000/ (1.00833)12 + 150000/ (1.00833)24 + 150000/ (1.00833)36 +
1000000/(1.00833)36
PV = 135787 + 122921 + 111274 + 741828
PV = 1111810