Q4.1What is the price of a Rs.15,000 eight year bond that was issued two years ago and
Question:
Q4.1What is the price of a Rs.15,000 eight year bond that was issued two years ago and has six years to run before the bonds maturity date. The interest is paid quarterly. The coupon rate is 10% and current market yield is 18%. How investing in bonds can be a better option than investing in shares of the Company, when the company is offering a return of 20%. (2 Mark)
Q4.2Investors are being offered shares in David Motors. David motor will pay their first dividend of Rs. 650 per share at the end of year 5. The expected growth rate is 8% a year. What should be the price of the stock if the investor want 25% return on investment? What do you think was the reason for the company to not pay dividends in the first 4 years? List at least 3 reasons.
Q4.3Mr. Ahmed is considering selling 10 Unilever, 10 year Debentures having face value of Rs. 150,000 for Rs. 100,000. Unilever is paying interest of Rs. 500 annually per instrument. The market rate is expected to be 15% annually. Calculate the gain/ loss on disposal of shares. Advice and justify Mr. Ahmed to whether retain or sell his debentures. Give proper financial reasoning.
Q4.4
A bond is issue on 18/06/2019 having face value of Rs. 1,500. The coupon is paid quarterly on 18/09, 18/12, 18/03 and 18/06 each year at the rate of 8% quarterly. The bond will expire on 18/06/2039. What should be the value of the bond if the market rate is 15% quarterly? Discuss similarities between a bond and an annuity.