FIN630 Assignment Solution 2021-VU-Investment Analysis and Portfolio Management
FIN630 Assignment Solution 2021-VU-Investment Analysis and Portfolio Management
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00:00Bismillah hir rahman ir raheem. Assalamualaikum dear students and viewers. Welcome to my YouTube channel DigiLand Apart.
00:06In today's video tutorial, we will solve assignment 2 of Investment Analysis and Portfolio Management Efficiency 3.0.
00:14Here is the assignment questions. This assignment has total marks 10 and its submission date is not mentioned here.
00:24I don't know what is the last day for submission. Ok, leave it.
00:36A coupon bond is a type of bond that includes attached coupons. It pays periodic interest payment and par value at majority.
00:46Interest payments are typically annual and semi-annual that are paid up during the bond's lifetime.
00:54Coupon bonds of two competitor companies are in the market.
01:00They are going to tell you about the bond. Bond is a tool through which companies are going to generate finance.
01:10It's a kind of debt. So, the interest they are going to pay on bond is called coupon and coupon rate.
01:18So, there are two kinds of bonds, zero coupon bond and there is also coupon rate on bond.
01:24And it will be disbursed equally on the basis of annual or semi-annual over the period of its maturity.
01:32So, don't go in more detail. Let's move to the questions.
01:38Coupon bond of ABC company that contains face value of Rs.1000.
01:42Coupon interest of 10% per annum payable annually and life to maturity is 5 years.
01:50The market price of this bond is Rs.105.
01:54Similarly, like ordinary shade, it has a par value or face value which is equal to Rs.1000.
02:04So, as per this question, a company has a right to issue bond at par value, discount or premium.
02:13So, here is the coupon interest rate is 10% and it is for the period of 5 years.
02:22And the market price of this bond is Rs.1050 means it is the price on which it is trading in the open market.
02:34Coupon bond of XYZ company that contains face value of Rs.1000.
02:39Coupon interest of 10% per annum payable quarterly and life to its maturity is 5 years.
02:48The market price of this bond is Rs.1070.
02:55So, there is another company labeled XYZ company.
02:59He also has a bond in the market which has a similar face value.
03:06Face value for all bonds is same which is also known as par value.
03:11It is also given to 10% annual.
03:17In corporate net or interest income, cash flow is coming towards your company.
03:23No, no, sorry, cash flow go outside the company to its bondholders.
03:32And it is also maturity period is 5 and its market price is Rs.1070.
03:39Notice that there is a difference of period payment.
03:46In first one, we are going to pay annually.
03:49But in the XYZ company, we are going to means company XYZ is going to pay it quarterly.
03:57So, requirements, first is if your required rate of return is 9% per annum, calculate the bond price value of the ABC company.
04:06And at what price you should be willing to purchase this bond after determining the value of the bond for ABC company.
04:19You are asking to tell at which price you are going to purchase this bond of ABC company.
04:30The same situation is for XYZ company where the required rate of return is 8% which is also called market interest rate or U2 maturity rate.
04:428% per annum, calculate the bond value of XYZ company and at which price you are willing to purchase this bond.
04:50Meaning, the price at which you are ready or agree to buy this bond.
04:57And the third requirement is if you are required to purchase only one bond from these two at their respective market price, which company bond would you buy and why?
05:08And the third scenario is that if you are confined to buy only one bond at one time or you are constrained by your budget, so in this situation, which bond would you prefer to buy?
05:21That's what you are going to be explained in talk number 3.
05:27So, let's move to the solution.
05:32Here is our solution of this assignment.
05:40First requirement is ABC company.
05:43Timeline we have done here from 0 to 5 means 5 years is maturity up to 5 years.
05:49So, annually payments we are going to multiply 1000 by 10% we will get 100.
05:57It means that company is going to pay 100 pays per annum to its bond holder up to 5 years.
06:07So, its coupon rate is equal to 10%, required rate of return is 9% and N is equal to 5 years.
06:14So, it is the type of ordinary annuity because the company is going to be paid on annual basis in a constant or same pattern.
06:25So, cash flow is following the same or constant pattern of payment.
06:31That's why we are going to use ordinary annuity.
06:34Price value of the bond which is also known as present value is equal to CF.
06:39Cash flow divided by R, R means required rate of return.
06:431 minus 1 over 1 plus R is power N.
06:46This formula plus 1000 divided by 1 plus R is power N.
06:50So, here N is equal to 5, R is equal to 9% and cash flow is equal to CF is equal to 100.
07:01And it is obtained by multiplying 0.105 by 1000.
07:05So, by plugging in all the required information in this equation we will get
07:11100 divided by 0.09, 1 minus 1 over 1 plus 0.09 raised to power 5 plus 1000.
07:28So, we will get by solving this portion 1111.1111.
07:371 minus 0.64 by solving this element we will get this figure in fraction plus by solving this is 49.93.
07:47So, by solving this we will get 388.97 plus here 149.93.
07:53By adding this one we will get 1038.9.
07:58At this price buyer is willing to buy the bond because it is less than its market price.
08:05Otherwise it will not purchase it.
08:08Now, come to the requirement 2.
08:10So, let's see XYZ is equal to company.
08:15So, fair value is equal to 1000.
08:17Company rate is equal to 10% per annuity.
08:19Required rate of return is 8%.
08:21N is equal to 5.
08:22But the payment is made by the XYZ company on quarterly basis.
08:29So, we are going to make relatable alteration here.
08:32Before I proceed that I didn't read from the question it is quarterly basis.
08:40I think it is also 10%.
08:42That's why I am going to make some correction here by reading it again.
08:48Then I request you understand here.
08:51Quarterly corporate payment means 100 divided by 4 is equal to 25.
08:57There are 4 quarters in a year.
08:591 quarter is of 3 months.
09:01So, we are going to convert this payment in 4 payments other than 1 as we discussed in the first task 25.
09:10Similarly, we are going to convert required rate of return which is noted by I or equal to the quarterly payment period 4.
09:25So, 0.08 divided by 4 is equal to 0.02.
09:28Now, we are going to use these amounts or figure in our upcoming solution.
09:39This is the timeline.
09:41So, now we have 20 period which is 4 into 5 is equal to 20 starting from 1, 2 and 20.
09:50So, I have cancelled this one 100 and write it 25.
09:54You please write 25, 25 and 25.
09:57Now, the formula is same.
10:0125 quarterly payment divided by 0.02.
10:06Quarterly required rate of return 1 minus 1 is equal to 1.02.
10:1120.
10:14N is equal to 20.
10:170.08 divided by 4 is equal to 0.02 plus 1 is equal to 1.02.
10:23Plus 1000 divided by 1 is equal to 0.02.
10:2620.
10:28408.79 plus 672.97.
10:33Total sum is 1081.76.
10:37Rated to buy at market price because it is less than its present value.
10:45So, investor will invest in the bond of XYZ company because market price will be 1070 is less than its present value 1081.76.
10:56I hope you understand this solution.
10:59If you have any query or question, please drop it in the comment section.
11:02Or otherwise, you are encouraging to share your own thoughts or want to contribute your knowledge regarding this solution.
11:14Please drop your valuable suggestions in the comment section.
11:18Further, if you found any error or mistake in calculation, please also mention in the comment section for the benefits of the all.
11:28Thanks for watching.
11:29Assalamualaikum.