07-11-2014, 02:20 PM
question No. 01
Par Value = Rs. 8,000
Coupon Rate =11.5 %
Required Rate of return, i = 9 %
Coupon payment = Coupon Rate * Par Value
= 0.115 * 8,000 = Rs. 920
Present value of Par value = 8,000 / (1+0.09)10
=8,000 / (1.09)10
= 8000/2.3673 = Rs. 3379.38 …………….. (A)
….> to calculate the present value of the coupon payment present annuity formula is used.
Present value of the coupon payments = 920 [1 – 1/ ( 1+0.09 )10 ]/ 0.09
=920 [1 – 1/ (1.09)10]/ 0.09
=920 [ 1 – 0.4224]/ 0.09
= 920 * [0.5775] / 0.09
= Rs. 5903.272 ……………… (B)
Adding (A) & (B)
Value of bond = 3379.38 + 5903.272 = 9282.652 Rs.
Question No. 02
Par Value = Rs. 8,000
Coupon Rate =11.5 %
Required Rate of return, i = 13 %
Coupon payment = Coupon Rate * Par Value
= 0.115 * 8,000 = 920 Rs.
Present value of Par value = 8,000 / (1+0.13)10
=8,000 / (1.13)10
= 8000/3.3945
= Rs. 2356.71 ………. (A)
Present value of the coupon payments = 920 [1 – 1/ ( 1+0.13 )10 ]/ 0.13
=920 [1 – 1/ (1.13)10]/ 0.13
=920 [ 1 – 0.2946]/ 0.13
= 920 * [0.7054] / 0.13
= Rs. 4992.012 . ……………… (B)
Adding (A) & (B)
Value of bond = 2356.71 + 4992.012 = 7348.722 Rs.
Comments :
When the required rate of return of the investor increases, the value of the bond decrease.this is called the interest rate risk.when the investor sees that the investment is riskier in response of that he increases its ROR.
Question No. 03
Required rate of return of stock B, rB = 17 %
Market Return , rM = 15.5 %
Beta, βB = 1.5
Risk free rate of return , r RF = ?
rB = r RF +( rM - r RF ) βB
17 % = r RF + (15.5% - r RF) * 1.5
17 % = r RF + 23.25%- 1.5 r RF
17 % = 23.25%- 0.5 r RF
0.5 r RF = 6.25 %
r RF = 6.25 % / 1.5
r RF = 12.5 %
Interpretation of Result:
Investor’s required rate of return is 17% in the investment of stock B which is higher than the market rate of return 15.5 %.because the stock(beta=1.5) is riskier than the market (beta =1.0)
So the investor will not invest in the stock B because It would not bring the required return for the investor
Par Value = Rs. 8,000
Coupon Rate =11.5 %
Required Rate of return, i = 9 %
Coupon payment = Coupon Rate * Par Value
= 0.115 * 8,000 = Rs. 920
Present value of Par value = 8,000 / (1+0.09)10
=8,000 / (1.09)10
= 8000/2.3673 = Rs. 3379.38 …………….. (A)
….> to calculate the present value of the coupon payment present annuity formula is used.
Present value of the coupon payments = 920 [1 – 1/ ( 1+0.09 )10 ]/ 0.09
=920 [1 – 1/ (1.09)10]/ 0.09
=920 [ 1 – 0.4224]/ 0.09
= 920 * [0.5775] / 0.09
= Rs. 5903.272 ……………… (B)
Adding (A) & (B)
Value of bond = 3379.38 + 5903.272 = 9282.652 Rs.
Question No. 02
Par Value = Rs. 8,000
Coupon Rate =11.5 %
Required Rate of return, i = 13 %
Coupon payment = Coupon Rate * Par Value
= 0.115 * 8,000 = 920 Rs.
Present value of Par value = 8,000 / (1+0.13)10
=8,000 / (1.13)10
= 8000/3.3945
= Rs. 2356.71 ………. (A)
Present value of the coupon payments = 920 [1 – 1/ ( 1+0.13 )10 ]/ 0.13
=920 [1 – 1/ (1.13)10]/ 0.13
=920 [ 1 – 0.2946]/ 0.13
= 920 * [0.7054] / 0.13
= Rs. 4992.012 . ……………… (B)
Adding (A) & (B)
Value of bond = 2356.71 + 4992.012 = 7348.722 Rs.
Comments :
When the required rate of return of the investor increases, the value of the bond decrease.this is called the interest rate risk.when the investor sees that the investment is riskier in response of that he increases its ROR.
Question No. 03
Required rate of return of stock B, rB = 17 %
Market Return , rM = 15.5 %
Beta, βB = 1.5
Risk free rate of return , r RF = ?
rB = r RF +( rM - r RF ) βB
17 % = r RF + (15.5% - r RF) * 1.5
17 % = r RF + 23.25%- 1.5 r RF
17 % = 23.25%- 0.5 r RF
0.5 r RF = 6.25 %
r RF = 6.25 % / 1.5
r RF = 12.5 %
Interpretation of Result:
Investor’s required rate of return is 17% in the investment of stock B which is higher than the market rate of return 15.5 %.because the stock(beta=1.5) is riskier than the market (beta =1.0)
So the investor will not invest in the stock B because It would not bring the required return for the investor