Question

Simone is considering to move funds from money market account to capital market. Her broker recommends three investments.

Investment 1: Corporate Bond A
It has a face value of $100,000 with a 5.75% p.a. coupon rate. Coupon is paid semi-annually. The bond will mature in five years. Yield-to-maturity (YTM) is 6.5% p.a.

Investment 2: Preference Share B
It has a face value of $100 with a 10% p.a. preference dividend rate. Cost of equity is 9% p.a.

Investment 3: Common Share C
It pays annual dividends and a $4 dividend was paid yesterday. As per the market consensus, the company’s dividend is expected to decrease by 5% per annum in the first three years, then grow by 20% for next two years. After that, the dividend growth rate will become 5% p.a. constant till foreseeable future. Cost of equity is 15% p.a.

b. Suppose Simone decides to create a portfolio by purchasing 1 corporate bond A, 1,000 preference share B and 3,000 common share C. After one month, their market prices become Investment Market Price Corporate Bond A $97,803.96 Preference Share B 110.39 Common Share C 38.53 How much is her investment return over the month? Assume no dividends or coupons paid during the month.

Answer 1

		CORPORATE BOND
		Face value	$100,000
	Rate	Semi annual Yield to maturity=(6.5/2)%=	3.250%
	Nper	Number of semi annual period to maturity=5*2	10
	Pmt	Semi annual coupon Payment =(100000*5.75%)/2	$2,875
	Fv	Payment at maturity at end of 5 years	$100,000
	PV	Current market Price	$96,841.60	(Using PV function of excel with Rate=3.25%,Nper=10,Pmt=-2875,Fv=-100000)
	A	Investment in Corporate Bond	$96,841.60
		PREFERENCE SHARE
	a	Annual Dividend =100*10%	$10
	b	Cost of Equity=9%=	0.09
	c=a/b	Market Value	$111.11
	B=c*1000	Investment in Preference Share	$111,111.11
		COMMON SHARES
		Year	Dividend
	D0	0	$4
	D1	1	$3.80	(4*0.95)
	D2	2	$3.61	(3.80*0.95)
	D3	3	$3.43	(3.61*0.95)
	D4	4	$4.12	(3.43*1.2)
	D5	5	$4.94	(4.12*1.2)
	D6	6	$5.185	(4.94*1.05)
	P5	Price of Share in Year 5=D6/(R-g), R=Equity Return =0.15, g= constant growth rate =0.05
		P5=5.19/(0.15-0.05)	$51.85
		P0=Current Price of share=Present Value of Future Cash Flows
		Present Value of Cash Flows=(Cash Flow)/((1+R)^N)
		R=Required Return =0.15, N= year of Cash Flow
			N	CF	PV=CF/(1.15^N)
			Year	Cash Flow	Present Value
		D1	1	$3.80	$3.30
		D2	2	$3.61	$2.73
		D3	3	$3.43	$2.25
		D4	4	$4.12	$2.35
		D5	5	$4.94	$2.46
		P5	5	$51.85	$25.78
				SUM	$38.88
	C	Investment in Common Shares =3000*38.88	$116,633.67
		Total Investment =A+B+C	$324,586.39
		Value of investment after one month	X	Y	Z=X*Y
			Value per Share/Bond	Number of Share/Bond	Total Value
		Corporate BondA	$97,803.96	1	$97,803.96
		Preference ShareB	$110.39	1000	$110,390.00
		Common ShareC	$38.53	3000	$115,590.00
				SUM	$323,783.96
		Investment Return 323783.96-324586.39=	($802.43)
		Investment Return in percentage =-(802.43/324586.39)	-0.247%
											E9 : B fc =PV(E5,E6,-E7,-E8) A C Rate Nper Pmt FV PV CORPORATE BOND Face value Semi annual Yield to maturity=(6.5/2)%= Number of semi annual period to maturity=5*2 Semi annual coupon Payment =(100000*5.75%)/2 Payment at maturity at end of 5 years Current market Price $100,000 3.250% 10 $2,875 $100,000 $96,841.60 (Using PV function of excel with Rate=3.25%,Npe