Financial Management - Question and Answer

FINANCIAL
MANAGEMENT
STUDENT ID:
[Pick the date]

Question 1
(a)The given phrase implies that for every $ 4 borrowed by the customer, $ 5 would need to
be paid after a week.
Hence, principal borrowed = $ 4
Amount returned after one week = $ 5
Thus, interest earned = $ 5-$4 = $ 1
Rate of interest = (1/4)*100 = 25% per week
(b)Effective annual rate of interest considering 52 weeks in a year =( (1.25)52-1)*100 =
10947544.25%
(c)(i) Principal borrowed = $ 10,000
Amount to be paid after 1 year = 10000*(1+10947544.25%) = $ 1,094,754,425
Interest charged = $ 1,094,754,425 - $ 10,000 = $ 1,094,744,425
(ii) Weekly interest on $ 10000 loan = (1/4)*(10000) = $ 2,500
Total interest payment in 52 weeks = 2500*52 = $ 130,000
(iii) Since in a year, there are 52 weeks given, hence 52 weekly payments would need to be
made.
Amount of weekly payment = 1,094,754,425 *0.25*1.2552/(1.2552-1) = $273,691,106
Since payment is starting today, hence weekly payment = ($273,691,106/1.25) = $
218,952,885
Total amount paid in 52 weeks = $ 218,952,885 * 52 = $ 11,385,550,023
Amount of interest paid during the year = $ 11,385,550,023 - $ 1,094,754,425 =
$10,290,795,597

Question 2
(a)Since Bond B is issued at the par value, hence the annualised coupon rate would be YTM
for this bond.
Annualised coupon yield on bond B = [(1.072)-1]*100 = 14.49%
Bond A par value = $ 1 million
Annual coupon on this bond = 10% of 1 million = $ 100,000
Time of maturity = July 1, 2025 – July 1, 2011 = 14 years
The price of Bond A as on July 1, 2011 would be the present value of all future cash inflows.
This is shown below.
Hence, bond A value as on July 1, 2011 is $ 736,736.09.
(b)Bond C price needs to be determined on January 1, 2014 and also on January 1, 2016. The
YTM on both dates have been given. Based on this, the price of the bond may be
determined.
Price determination of January 1,2014
EAR = 10.3812891%

Relevant discount rate per quarter since coupon payments are carried out quarterly =
(1.103812891)^0.25 -1 = 2.5%
Since this is the same as coupon rate of 2.5% per quarter, hence the price would be same
as face value of $ 1 million.
Price determination of January 1,2016
EAR = 12.550881%
Relevant discount rate per quarter since coupon payments are carried out quarterly =
(1.12550881)^0.25 -1 = 3%
The market price of the bond can be determined based on the following computation.