Question

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 ?

Answer 1

1)	equal annual payments			=	P*r*(1+r)^n/[{(1+r)n}-1]
		where
			P	=	Principal loan amount		=	SAR120,000
			r	=	interest rate		=	10%
			n	=	time in years		=	10 years
		Monthly payments		=	120,000*0.1*(1+0.1)^10/[{(1+0.1)^10}-1]
				=	12000*(1.1)^10/[{(1.1)^10}-1]
				=	12,000*2.5937/[2.5937-1]
				=	31124/1.5937
				=	SAR 19,529.397
2)	Time value of money means that a $ received today has greater value than $ received some time in future.The simple logic behind this concept is that if a $ is received today it can be invested to earn more money thereby increasing its value today.For simplicity ,a $100 which was to be received a year later,if received today can be deposited in the bank which will earn interest and totalvalue will be greater than $100 after one year.
3) (a)	Price of bond		=	PV of all interest payment+PV of redemption value
			=	[Coupon * PVAF (YTM,years to maturity)]+[PVF(YTM,years) *redemption value]
	Price of bond when purchased
		Coupon	=	$1000*7%=$70
		Years	=	10
		YTM	=	10%
		Redemption value	=	$1,000
		Price	=	[$70*PVAF(10%,10yrs)]+[PVF(10%,10yrs)*$1000]
			=	[$70*6.1446]+[0.3855*$1,000)
			=	$430.122+$385.5
			=	$                       815.62
3) (b)	since bond is offered at lower then inthrinsic value,ahmed should buy the bond
4)	Realized yeild		=	[(Coupon received+Sale price-purchase price)/purchase price]*100
			=	[($60+$798.8-$760)/760]*100
			=	[$98.5/$760]*100
			=	0.129605*100
			=	12.96%
		There may be little difference due to decimal places
		Ifyou have any doubt,please ask.
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