Business Finance

Question 1

Bond price is worked out as follows

Present Value of Interest Payments = {c × F × 1 − (1 + r)-t+Fr(1 + r)t}

Where F is the face Value,t is time to maturity and r is the market interest rate and C is the coupon rate in %

Coupon Rate

Maturity

Sensitivity of the Bond

Thos bonds with long maturity period with zero coupons are considered to be very sensitive to changes in interest rates. For our case, Bond A and B are considered to be very sensitive since it has 0% coupon rate.

Question 2

A zero beta portfolio is developed to have a zero systematic risk. It is assumed to depict similar expected return as the risk free rate the risk premium of a zero Beta stock is zero. In substituting a zero beta stock with s risk free asset, the expected return of the portfolio there will not any change but the volatility will increase (Grandville, 2003).

Question 3

A). The amount of loan taken

P.V={12000/5/5 %{ 1-1/1.055^30years)

P.V= (363636.4{0.799356) =$ 190674.9

b) You have lived in the house for 10 years?

This means 20 years is remaining for repayment

P.V={12000/5/5 %{ 1-1/1.055^20years)

P.V= 363636.4{0.657271) =$139007.6

c) You have lived in the house for 19 years?

Time remaining for repayment is 11 years

P.V={12000/5/5 %{ 1-1/1.055^11years)

P.V= 363636.4{0.445089) =$61850.7

d) You have lived in the house for 10 years and you decide to pay off the mortgage immediately before the 10th payment is due?

The payment shall be same to what was to be paid in part a plus the amount of the 10th payment as follows

=$ 190674.9+$1200} =$202674.9

Bibliography

Grandville, L., 2003. Bond Pricing and Portfolio Analysis: Protecting Investors. London.

Parameswaran, S., 2007. Bond Valuation, Yield Measures and the Term Structure. New York.

Ulrici, V., 2007. Bond Valuation in Emerging Markets — Page 145. New York.