Ask Question, Ask an Expert


Ask Basic Finance Expert


problem 1

(a) Mary is celebrate her 30th birthday; she has decided that as from her 31st birthday she should start to make a payment to a pension plan, so as to safe her expenses once she retires at the age of 60 years old. By studying her family background, Mary estimates that she could live up 85 years. Mary has estimated that once she retires in order to meet her expenses, she would require at least Rs42 000 each year. She also desires Rs30 000 to be left to cover her final expenses, comprising cremation.

After having contacted some insurance companies; the following two investment alternatives were offered to Mary.

(i) Pay a premium of Rs4000 each year, till her 60th birthday.

(ii) Pay a premium of Rs3000 each year, till her 40th birthday. Then pay a premium of Rs4500 from her 41st birthday, until her 60th birthday.
Suppose that the long-term interest rate that will succeed for the two alternatives is equal to 8%. 
Elucidate in details which one of the two alternatives given by the insurance companies, you would advise Mary to undertake and which will facilitate her to cover all the prospect expenses that she has estimated.

(b) Company March has issued stocks in the market; the strategy of the company is to reinvest all its earnings over the next two years. At the end of year two it is forecasting earnings per share of Rs10 and a payout ratio of 0.4 for the subsequently year. 
It is being forecasted that as from the end of year three and over the next five years, the dividend growth rate will be stable at 10%. Then over the next three years there will be a constant gradual diminish in the growth rate and it will stabilize at 4% at that time; the constant dividend growth rate of 4% will succeed for an indefinite time period. Today the stocks of Company March are selling at Rs100 in the market and Mr. May desires to assess if an investment in the stocks of the company would be a good investment. The needed rate of return of Mr. May is equivalent to 8%.

Compute the actual intrinsic value of the stock issued by Company March and advise if it is a good investment for Mr. May.


problem 2

(a)  An investor desires to purchase a stock, after studying the market he has picked two stocks issued by companies Red and Blue and he has collected the following detail about the stocks:

- Company Red is anticipated to pay a fixed amount of dividend equivalent to Rs10 each year over an indefinite time period.

- Company Blue paid a dividend of Rs5 in the past year and it is anticipated that its dividend will grow at a constant rate of 4% over an indefinite time period.

The needed rate of return of the investor is equivalent to 10%.

(i) If the market prices of the stocks issued by the companies Red and Blue are as follows: Rs110 and Rs80; elucidate if the investor must purchase stocks from Company Red or Company Blue or must purchase none of the stocks.

(ii) If the inflation rate is raised, could this have an impact on the decision taken by the investor in part (i) of this problem. Elucidate.

(b) A bond has maturity 2 years, with coupon rate 5% and nominal value Rs1000. If Rs1018.8609 is invested in the bond (market price of bond), what is the YTM?

(c) At the 01/ 09/ 08 an investor is purchasing a bond from a seller; the last coupon on bond was paid on the 01/ 05/ 08 and the maturity date is 01/ 05/ 12. The bond has a coupon rate of 10% and nominal value Rs1000. The yield to maturity is equivalent to 8%. Find out the dirty price paid by the buyer.  (Assume 30 days per month)

problem 3

(a) If the efficient market hypothesis holds, which of the subsequent statements are true/false? Briefly rationalize each of your answers.

(i) It implies that prospect events can be forecast with perfect accuracy

(ii) It implies that prices reflect all available information

(iii) It implies that prices fluctuate in a random way

(b) Briefly distinguish between the 3 dissimilar forms of ‘Market Efficiency’.

(c) Briefly elucidate a test which can be used to assess if a market is efficient in the weak form.

problem 4

(a) Describe the main attributes possessed by debt securities that are issued by the two main issuers. Give any four exs of debt securities issued by these two issuers.

(b) A bond issued by a company has a nominal value of Rs100, with an annual coupon rate of 7.4% and maturity 3 years. find out the intrinsic value of the bond if annual required rate of return is equal to 7% and the coupon payments are made semi-annually. If the market price of the bond is equal to Rs100, would you advise an investor to purchase the bond?

(c) The probable rates of return of two assets, A and B, under different economic conditions are given below:


Situation          Probability     Return of Asset A             Return of Asset B
Recession            0.2               10%                                   6%
Stable                 0.5               14%                                  15%
Growth                0.3               20%                                 11%

An investor places 50% of his funds in Asset A and 50% in Asset B.

[Note: you may use correlation between A and B as 0.2401]


(i) Compute the risk and expected return for each asset.

(ii) Compute the risk and expected return of the investor’s 2-assets portfolio.

(iii) What do you understand by total risk?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M91648

Have any Question? 

Related Questions in Basic Finance

You are being interviewed for a job as a financial

You are being interviewed for a job as a financial assistant. As part of the interview process, the office manager tells you there will be a short test to assess your familiarity with basic financial terms which would pl ...

What is the difference between the types of projects

What is the difference between the types of projects financed by the World Bank and those funded by the International Finance Corporation?

What is the empirical evidence on whether capital gains tax

What is the empirical evidence on whether capital gains tax cuts lead to a permanent increase in capital gains realizations? What does this evidence imply for the prospects of lowering capital gains taxes as a long-term ...

Excel exercise loan amoritizationloan amoritization video

Excel Exercise: Loan Amoritization Loan Amoritization Video: Create a Loan Amortization Schedule Excel Assignment For this assignment you are required to create two loan amorti ...

Problemthe guidance system of a ship is controlled by a

Problem The guidance system of a ship is controlled by a computer that has three major modules. In order for the computer to function properly, all three modules must function. Two of the modules have reliabilities of .9 ...

Finance reporton the 4th of october 2016 the reserve bank

Finance Report On the 4th of October 2016, the Reserve Bank of Australia (RBA) board will meet to discuss domestic and global economic conditions and release its monetary policy statement, having decided upon the appropr ...

1assume the hong kong dollar hk value is tied to the us

1. Assume the Hong Kong dollar (HK$) value is tied to the U.S. dollar and will remain tied to the U.S. dollar. Assume that interest rate parity exists. Today, an Australian dollar (A$) is worth $.50 and HK$3.9. The one-y ...

A raffle has a grand prize of a european cruise valued at

A raffle has a grand prize of a European cruise valued at $6500 with a second prize of a Las Vegas getaway valued at $700. If each ticket costs $3 and 8600 tickets are sold, what are the expected winnings far a ticket bu ...

Why do people commit each of the following crimes who is

Why do people commit each of the following crimes? Who is hurt by the crimes? Discuss who is hurt directly and also the broader effects on the financial system. (As an analogy, shoplifting hurts store owners directly; it ...

The domestic and international financial marketplace topic

The domestic and international financial marketplace. Topic include financial markets, types of financial intermediaries, the form and methods of stock market operation, the stock market, multinational corporation, forei ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

A cola-dispensing machine is set to dispense 9 ounces of

A cola-dispensing machine is set to dispense 9 ounces of cola per cup, with a standard deviation of 1.0 ounce. The manuf

What is marketingbullwhat is marketing think back to your

What is Marketing? • "What is marketing"? Think back to your impressions before you started this class versus how you

Question -your client david smith runs a small it

QUESTION - Your client, David Smith runs a small IT consulting business specialising in computer software and techno

Inspection of a random sample of 22 aircraft showed that 15

Inspection of a random sample of 22 aircraft showed that 15 needed repairs to fix a wiring problem that might compromise

Effective hrmquestionhow can an effective hrm system help

Effective HRM Question How can an effective HRM system help facilitate the achievement of an organization's strate