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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 ***** 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).
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 ***** 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

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· 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?

Solution:

MGT411 Assignment # 1

Question # 1: part (A)

To solve this question first we have to calculate the future value

Pv*(1+ ( i/n ))^n

=1000*(1.05)^30 = 4321.942

Put the figures in the formula for PV

Present value formula = fv/(1+(i/n))^n

4321.942 / (1.06)^30 = 752.494

(Note: This bond is not acceptable)

Question # 1: part (B)

In an equation,

c(1 + r)-1 + c(1 + r)-2 + . . . + c(1 + r)-Y + B(1 + r)-Y = P

Where

c = annual coupon payment (in dollars, not a percent)

Y = number of years to maturity
B = par value
P = purchase price

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YTM = c (1 + r)-1 + c(1 + r)-2 + . . . + c(1 + r)-Y + B(1 + r)-Y

Coupon rate = 12%

Coupon payment = 950*(1.12) = 1120

(Solve it by your self. Final solved file will uploaded 24 hrs before last date)

Question # 1: part (C)

IRR = -Io + cf/(1+i)^n + cf/(1+i)^n + cf/(1+i)^n +…….

-50,00000 + 20,00000/(1+.19)^1+25,00000/(1+.19)^2+10,00000/(1+.19)^3
+ 15,00000 /(1+.19)^4 + 500,000 / (1+.19)^5

-50,00000 + 1680672+ 1765412 +593415.8+748003.1+209524.7 = -2972.06

this is most appropriate ans.

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