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Q1. Suppose Abdulrahman Plan to borrow a loan of SAR 120,000 now and will repay it in 10 equal annual installments. If the bank charges 10% interest, What will be the amount of the annual installment?   

Q2. Briefly discuss the Time Value of Money concept?   

Q3. Ahmed has been offered a 10-year bond issued by Homer, Inc., at a price of $800. The bond has a coupon rate of 7 percent and pays the coupon semiannually. Similar bonds in the market will yield 10 percent today.   

1. What should be the price of this bond?
2. Should Ahmed buy the bonds at the offered price?

Q4. Suppose a 3 year bond with a 6% coupon rate that was purchased for $760 and had a promised yield of 8%. Suppose that interest rates increased and the price of the bond declined. Displeased, you sold the bond for 798.8 after having owned it for 1 year. What should be the realized yield ?

(1 Mark)

Ans:

Answer 1

Q1)

Annual payment [Pxrx(1+r)^n] =((1+r)^n-1] Here, 1 Interest rate per annum 2 Number of years 3 Number of compoundings per per annum 1:3 Interest rate per period (r) 2x3 Number of periods (n) Loan amount (P) 10% 10 1 10% 10 $ 120,000 Annual payment $ 19,529.45 (120000x10%*(1+10%)^10)+((1+10%)^10-1)

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