Question 1 (25 marks) Peter wants to save $500,000 to buy a sport car. He plans to make a deposit of $8,000 each month to achieve this goal. ABC Bank offers a deposit rate of 0.5% per month while DEF Bank offers a deposit rate of 6% with quarterly compounding. a) Which bank should Peter choose? Briefly explain your answer with appropriate calculations (within 20 words). b) After making the deposit into the chosen bank as mentioned in part (a), how long does Peter have to wait to achieve his goal if he starts making his first deposit 1) today? ii) one month later? iii) six months later? c) ABC bank has poor credit ratings and the management of the bank has recently offered higher saving interest rates to attract and retain new customers. Peter told you that he can also formulate a strategy that can achieve his target without using any of his own capital. The strategy is to borrow a 5-year loan of $400,000 from OZ bank with a fixed monthly interest rate of 0.1%, and immediately, he deposits the whole amount into ABC bank saving account to earn an interest rate spread of 0.4% (0.5% - 0.1%). Peter believed that his plan is perfect, risk free and does not need any capital funding at all. He also claimed that he will know exactly how long he has to wait by simply solving the variable "t" in the below equation 1: Equation 1: $400,000(1 + 0.4%)' = $500,000 i) Solve the value of "4" in above equation 1. Do you agree with Peter's strategy? Briefly explain your answer (within 50 words). ii) Do you agree with Peter's strategy is really so perfect and has no risk as he think? Briefly explain your answer (within 150 words). Question 2 (25 marks) Bananic Ltd. raised $30 million by issued a 10-year, 7 percent semi-annual coupon bonds one year ago. The bond was rated grade A when issued at par. Today, the yield-to-maturity (YTM) of the bond yields an effective annual rate of return of 12 percent. a) How many bonds did Bananic issue? b) Is the bond a premium bond or discounted bond today? Explain your answer without any calculation c) Determine the bond price today. d) Given that the bond's rating just dropped from A to Baa. Answer and explain your answer for the following questions (within 30 words for each of the following sub-parts). i) Will the YTM tomorrow higher or lower than today? ii) Will the bond price tomorrow higher or lower than today? iii) Will the coupon rate tomorrow higher or lower than today? iv) Will the current yield tomorrow higher or lower than today? e) You friend, Mary, tells you that a speculator (i.e. an investor who speculates on short term profits) should purchase a higher coupon bond rather than a lower coupon bond if a credit event (a "credit event" occurs when a person or organization defaults on a significant transaction, in which he or she is unable to honor the terms of the contract entered) is foreseen. Do you agree with her? Explain your answer. [within 60 words] End of Assignment - Question 1 (25 marks) Peter wants to save $500,000 to buy a sport car. He plans to make a deposit of $8,000 each month to achieve this goal. ABC Bank offers a deposit rate of 0.5% per month while DEF Bank offers a deposit rate of 6% with quarterly compounding. a) Which bank should Peter choose? Briefly explain your answer with appropriate calculations (within 20 words). b) After making the deposit into the chosen bank as mentioned in part (a), how long does Peter have to wait to achieve his goal if he starts making his first deposit 1) today? ii) one month later? iii) six months later? c) ABC bank has poor credit ratings and the management of the bank has recently offered higher saving interest rates to attract and retain new customers. Peter told you that he can also formulate a strategy that can achieve his target without using any of his own capital. The strategy is to borrow a 5-year loan of $400,000 from OZ bank with a fixed monthly interest rate of 0.1%, and immediately, he deposits the whole amount into ABC bank saving account to earn an interest rate spread of 0.4% (0.5% - 0.1%). Peter believed that his plan is perfect, risk free and does not need any capital funding at all. He also claimed that he will know exactly how long he has to wait by simply solving the variable "t" in the below equation 1: Equation 1: $400,000(1 + 0.4%)' = $500,000 i) Solve the value of "4" in above equation 1. Do you agree with Peter's strategy? Briefly explain your answer (within 50 words). ii) Do you agree with Peter's strategy is really so perfect and has no risk as he think? Briefly explain your answer (within 150 words). Question 2 (25 marks) Bananic Ltd. raised $30 million by issued a 10-year, 7 percent semi-annual coupon bonds one year ago. The bond was rated grade A when issued at par. Today, the yield-to-maturity (YTM) of the bond yields an effective annual rate of return of 12 percent. a) How many bonds did Bananic issue? b) Is the bond a premium bond or discounted bond today? Explain your answer without any calculation c) Determine the bond price today. d) Given that the bond's rating just dropped from A to Baa. Answer and explain your answer for the following questions (within 30 words for each of the following sub-parts). i) Will the YTM tomorrow higher or lower than today? ii) Will the bond price tomorrow higher or lower than today? iii) Will the coupon rate tomorrow higher or lower than today? iv) Will the current yield tomorrow higher or lower than today? e) You friend, Mary, tells you that a speculator (i.e. an investor who speculates on short term profits) should purchase a higher coupon bond rather than a lower coupon bond if a credit event (a "credit event" occurs when a person or organization defaults on a significant transaction, in which he or she is unable to honor the terms of the contract entered) is foreseen. Do you agree with her? Explain your answer. [within 60 words] End of Assignment