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FIN630 Assignment 1 Solution Spring 2017

Mr. Waqar has Rs. 10 million for investment in capital market. He has planned to make a portfolio mix of equity and fixed income securities. He has decided to invest 40% in equity and 60% in fixed income securities. He is a value investor, he believes that investments can take time to grow and being an investor we should wait for the time investments can grow. For the equity portion of the portfolio, he has decided to purchase shares of ABC Company (blue chip stock). However, he is not sure about the fixed income securities. He has three different options available. Following are the details of the ABC Company bonds available for investment.

Bond X was issued at Rs.1, 000 par value 14%, 5-year bond. Bond is issued at premium with annual coupon payments. Required rate of return for such type of securities is 12%. Return on T-bills is 10%. Rating for ABC Company for the current year is BB. Bond is currently trading at Rs.955.

Bond Y was issued at Rs.1000 par value 11%, 5-year bond. Bond is issued at premium with annual coupon payments. Required rate of return for such type of securities is 9%. Return on T-bills is 10%. Rating for ABC Company for the current year is BB. Bond is currently trading at Rs.1300.

Bond Z was issued at Rs.1000 par value 16%, 5-year bond. Bond is issued at discount with annual coupon payments. Required rate of return for such type of securities is 18%. Return on T-bills is 10%. Rating for ABC Company for the current year is BB. Bond is currently trading at Rs.830.

Requirement: You are required to calculate the intrinsic value of the bonds. Also state whether the bond is overvalued or undervalued, provide logical reasoning. Also suggest to Mr. Waqar which bonds he should choose to develop his portfolio. Give logical reasoning for your answer.

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