Question

A Aav AO EVENE E * A2A EE 21 Asus Styles Style Pan 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? (1 Mark) Ans: Q1. Briefly discuss the Time Value of Money concept? (1 Mark) Ans: 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. (2 Marks) a. What should be the price of this bond? b. Should Ahmed buy the bonds at the offered price? Ans: 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: aglish (United States) C Focus EEE Up next

Answer 1

Since he plans to borrow 120,000 now and will repay in 10 equal installments interest rate = 10% loan amount = 120,000 Number of periods = 10 Use the excel formula to find the value of annual payments PMT(10%, 10,-120000) 19,529.45 Time value of money Time value of money says that the value of dollar today is more than the value of the dollar after a certain period. That is why when we borrow money investors expect to be compensated for the loss in value and we pay interest on that. For example the value of $100 today is more than the value of $100 dollar a year later. Q-3) lets say the face value of the bond is 1000 Face value 1000 Time period 20 Coupon payment = 0.07*1000 35 periodic yield = 10%/2 Use the financial calculator to calculate the price of the bond price 813.07 Yes he should buy the bond at 800 because he is getting it at cheap price Q-4) you bought the bond a year back and hold it for a year and then sold it, so you have received coupon at the end of the year Coupon payment = 0.06*1000 = 60 purchase rice of the bond = 760 Sale price of the bond = 798.8 So realized yield = (798.8-760 +60)/760 *100 13.00 %