Question 3

Valuation of Financial Instruments You have $200 000 to invest and you will be allocating this into the following three financial instruments:

1. A government bond that has face value of $1 000 paying quarterly coupons of b% p.a., maturing in C years at par and the market is pricing it such that the yield to maturity is d% p.a.

2. Stocks in a large utilities corporation that is expected to pay $P dividends constantly in six months time. The company pays annual dividends and is priced such that the return on equity is r% p.a.

3. Stocks in a rising star cleantech company that is expected to pay $F dividends in two years time, and with subsequent annual dividends to grow by g% p.a. indefinitely. The stock is priced with an implied return on equity of h% p.a.

For the pronumerals above, they are defined as follows:

b = 4.8% if your second letter of your surname is A-H, 3.6% if I-P and 5.6% if Q-Z. (4.8%)

C = 10 years if your student ID is an odd number and 5 years if even. (odd = 10 years)

d = 4% if the last letter of your first name is A-H, 6% if I-P and 3% if Q-Z. (=4%)

P = $1.20 if your first number of your student ID is an odd number and $1.50 if even. (= odd = $1.2)

r = 8% if the sum of the first and last number of your student ID is an odd number and 10% if even. (odd =8%)

F = $0.05 if your month of birth is even and $0.07 if odd. (=0.07)

g = 2% if your day of birth is 1st-10th, 1.5% if 11th-20th and 2.5% if 21st-31st .

h = 15% if the product of your day of birth and month of birth divides into 3, 18% if there is a remainder of 1 and 21% if there is a remainder of 2. (=15%)

a.) Set up the appropriate valuation tables that will allow you to calculate the value of the bonds and stocks.

b.) Calculate the price of the bond.

c.) Calculate the value of the stock of the large utilities corporation.

d.) Calculate the value of the stock of the cleantech company.

The combination of the three instruments you include into your portfolio is l%, m% and (100 l m)%, respectively, where:

l = 30% if you are enrolled in the Parramatta campus, 20% if Brisbane and 40% if by distance. (=40%)

m = 30% if the last letter of your name is A-H, 20% if I-P and 40% if Q-Z. (=30%)

e.) How many units of each would you hold in your portfolio? Note you cannot hold partial units of these instruments.