Agya Appiah is a rich farmer in Nkorsuo, a town in the Keteni District Assembly. He owns over 100,000 hectares of farmlands. However, he fears the worst might happen and wants to do some investments to secure his future and that of his children. He is contemplating long-term investments to secure his future and his childrens. He is now 50 years old and plans to retire in 10 years from active farm work. He expects to live for another 25 years after he retires that is, until age 85. A friend advised him that investing in the financial market will help him plan his retirement well. He has no idea about financial markets and how they operate. You recently graduated from the School of Graduate Studies, University of Professional Studies, Accra, and have just reported to work as an investment advisor at the brokerage firm of Wodaakye Ltd. Agya Appiah has approached your company for advice. Your boss, after a discussion with Agya Appiah gathered the following information. Agya Appiah wants his first retirement payment to have the same purchasing power at the time he retires as GH 40,000 has today. He wants all of his subsequent retirement payments to equal his first retirement payment. (Do not let the retirement payments grow with inflation: Agya Appiah realizes that the real value of his retirement income will decline yearly after he retires.) His retirement income will begin the day he retires, 10 years from today, and he will receive 24 additional annual payments. Inflation is expected to be 5% per year from today forward. He currently has GH100,000 saved up, and he expects to earn a return on his savings of 8% per year with annual compounding.

Again, he wants to have secured university education for his lovely daughter, Abena. His daughter is now 13 years old. She plans to enrol at the University of Professional Studies, Accra, in 5 years, and it should take her 4 years to complete her education. Currently, the cost per year (for everything her food, clothing, tuition, books, transportation, and so forth) is GH 12,000 per year. This cost is expected to remain constant throughout the four-year university education. The daughter recently received GH 7,500 from her grandfathers (Nana Ntows) estate; this money will be invested at a rate of 8% to help meet the costs of Abenas education. The rest of the costs will be met with money Agya Appiah will deposit in a savings account, which will also earn 8 percent compound interest per year. He will make 5 equal deposits into the account, one deposit per annum starting one year from now until his daughter starts university. These deposits will begin one year from now. (Assume that school fees are paid at the beginning of the year).

Again, Agya Appiah is interested in buying a bond issued by Esua Ltd. The company intends to use the proceeds of the bonds to finance the production of its new vaccine for a new virus that has ravaged the Keteni District. The bond has a face value of GH10,000 at a coupon rate of 12% and a term to maturity of 10 years. The bond expects to pay coupons annually. Included in the bond indenture are call and sinking fund provisions. The required rate of return on the market for bonds with similar features is 18% per annum. Your boss had asked you to advise Agya Appiah based on the information he provided.

Required

a. Explain to Agya Appiah what financial markets mean and which three (3) financial instruments he can invest in so for his retirement. (4 marks)

b. To the nearest cedi, how much must he save during each of the next 10 years (with equal deposits being made at the end of each year, beginning a year from today) to meet his retirement goal? (Note: Neither the amount he saves nor the amount he withdraws upon retirement is a growing annuity.) (5 marks)

c. What will be the present value of the cost of 4 years of education at the time the daughter Abena turns 18?

(2 marks)

d. What will be the value of the GH 7,500 that Abena received from her grandfathers estate when she starts college at 18? (2 marks)

e. If Agya Appiah is planning to make the first of 5 deposits one year from now, how large must each deposit be for him to be able to finance his daughters college education? (2 marks)

f. Explain to Agya Appiah what call provisions and sinking fund provisions are and how these provisions are expected to affect the risk of the bond (2 marks)

g. Which value will you place on a bond of Esua Ltd?