Question 1a

SAI Ltd issued a $250,000 bond at the coupon rate of 2 percent payable semi-annually. Now, the bond has a remaining life of 4 years.

1. Two years from now, you bought the SAI bond when the market interest rate for a new SAI bond is 4 percent. How much did you pay for the bond?

Illustrate your answer using the bond valuation equation and not using an online calculator / software.

2. You sold the bond purchased in part i. after holding it for a year, when interest rates (for bonds of similar risk as SAIs bonds) fell to 3 percent. What is the percentage gain / loss on the bond? Illustrate your answer using the bond valuation equation and not using an online calculator / software.

Question 1b

The current market value of a firms share is $32 million, with 20 million shares outstanding. The net profit after tax is estimated to be $5 million. Investors are willing to pay a value equivalent to 20 times of the firms earnings. Based on the price-earnings multiple valuation model, are the firms shares fairly priced? Should an investor buy the share? Explain why.