Question

An investor considers investing 100 000 TL for the next year. This investor has 3 options. The first option is to buy a government bond that sells 100 TL. The par value of this government bond is also 100 TL and the remaining maturity is 1 year. This government bond pays %20 annual coupon interest. The second option is to buy a commercial paper which sells 2200 TL discount. The par value is 10 000 TL and the maturity is 1 year. The other alternative is to invest in a common stock for a year. The current market price of the common stock is 6 TL per share and 1-year target price estimation of the market analysts is 7.90 TL on average for this share. Which option would you invest in and why? Show your answer mathematically.

Answer #1

As the Government bond is selling at par value (TL 100), the YTM
of the bond is the same as its coupon rate i.e. the return from
Investing in the bond will be **20%**

The Commercial Paper is available at TL 10000 - TL 2200 = TL 7800

and the maturity amount is TL 10000

So, Return on Commercial Paper =2200/7800 =
**28.21%**

Return on Share = (7.9-6)/6 = **31.67%**

**From the available options , highest return is promised
by the share and so Shares must be chosen (ignoring the riskiness
of options)**

1) A firm has total assets of 25 million TL. Its current assets
is 10 million TL and fixed assets (machinery, real estate etc) is
15 million TL. This firm’s financial leverage is %45. Firm has 1
500 000 total outstanding shares with 900 000 shares trading at the
stock market and one share sells 10 TL in the stock market. What is
the firm’s Price/Book ratio( PD/DD)? Calculate the expected stock
price and market cap if the average Price/Book...

An investor has a 12% bond that pays semi-annually with a par
value of R1 000. The bond has a market price of R1 200 and 20 years
to maturity. What is the bond equivalent yield of the bond?

An investor has the following two options:
To buy a two-year $1,000 zero-coupon bond at a market price of
$860, or:
To buy a two-year $1,000 bond with an annual interest of 3% at
a market price of $900.
Assuming annual coupon payments, which option do you think the
investor should choose? Explain why.

You want to invest 50.000 TL at the beginning of each year for
the next 6 years. You have got following options: If you deposit
your money in the bank, you get 6% interest income per year. Also,
if you invest your money in a 3-year government bond, you can get
5.5% per year and have a current market price equal to 92% of face
value. However, the government deducts 12% tax per year from the
interest income you get...

An investor considers the purchase of a 3 year bond with a 7%
coupon rate, with interest paid annually. Assuming the sequence of
spot rates shown below answer the following questions.
A. The present value of the bond's final cash flow is:
B. The yield to maturity of this bond is
Time to maturity: Spot rate:
1 3%
2 5%
3 7%

A stock has a price of 100. It is expected to pay a dividend of
$3 per share at year-end. An at-the-money European put option with
1 year maturity sells for $8. If the annual interest rate is 4%,
what must be the price of an at-the-money European call option on
the stock with 1 year maturity.

You want to invest 40.000 TL at the beginning of each year for
the next 5 years. You have got following options: If you deposit
your money in the bank, you get 5% interest income per year. Also,
if you invest your money in a 3-year municipal-bond, you can get
6.5% per year and have a current market price equal to 104% of face
value. However, the government deducts 12% tax per year from the
interest income you get from...

Havertown Audio has an outstanding bond issue with an total par
value of $100 million. The bonds are selling at a quoted price of
110% of par value and have a yield to maturity of 5.65%. The
company also has 8 million shares of common stock outstanding. The
stock has a beta of 1.3 and sells for $30 per share. The yield on
10 year U.S. Treasury bonds is 3% and the market risk premium is
7%. Havertown Audio has...

An investor is very bullish about the stock market but does not
want to take too much
risk. He decides to buy four American call options on one
particular stock. Each option is
for 100 shares with exercise price at $65 per share and maturity of
eight months. He is told
that the expected return from the stock is 20% per annum with
annual volatility of 30%.
The current stock price is $61. The risk{free rate is 6% per annum....

(Related to Checkpoint 9.2 and Checkpoint 9.3) (Bond valuation)
Fingen's 14 -year, $1 comma 000 par value bonds pay 9 percent
interest annually. The market price of the bonds is $1 comma 100
and the market's required yield to maturity on a comparable-risk
bond is 10 percent.
a. Compute the bond's yield to maturity.
b. Determine the value of the bond to you, given your required
rate of return.
c. Should you purchase the bond? a. What is your yield...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 1 minute ago

asked 15 minutes ago

asked 19 minutes ago

asked 19 minutes ago

asked 19 minutes ago

asked 22 minutes ago

asked 26 minutes ago

asked 28 minutes ago

asked 28 minutes ago

asked 31 minutes ago

asked 43 minutes ago

asked 48 minutes ago