Bond Valuations

Questions: Jasmine Ltd is considering issuing bonds to raise funds for a new project. The following three options are being considered. Bond Coupon Rate Coupon/Compounding Frequency Yield Term in years Face Value A 0% half-yearly 7.5% 5 $1,000 B 6.5% half-yearly 7.5% 10 $1,000 C 8.4% yearly 7.5% 8 $1,000 a) Calculate the market price of each bond. b) Classify each bond as either selling at a premium, par or discount. c) Assume Jasmine has decided to issue only B Bonds. If Jasmine Ltd needs to raise $465,260 how many bonds would need to be issued? Answers: Executive Summary The report contains solution to all the three questions regarding Portfolio Valuation, Bond valuation, and Share valuation. In Portfolio Valuation it was found that as the correlation between the two shares is negative thus investing in both the shares can lead to less risky portfolio. In the Bond valuation, the market price of each bond was calculated and it was found that the market price of Bond A is the least while the market price of Bond C is the highest. Thus if the investor wants to purchase a new bond then must purchase Bond A as it is currently at a discount. In case of Share valuation, the market price of the share for different scenarios were calculated and it was found that SuperGrowth has the highest market price. Thus the report helps in understanding the three topics and helps in valuation of different financial assets. Bond Valuation Given, Bond Coupon Rate Coupon/Compounding Frequency Yield Term in years Face Value A 0% half-yearly 7.5% 5 $1,000 B 6.5% half-yearly 7.5% 10 $1,000 C 8.4% Yearly 7.5% 8 $1,000 We know, Price of a bond is given by Where C = coupon payment, m = number of times payment made in a year, n = life of the bond i = yield rate F = face value a). The market price of bond A = P = 692.02 The market price of bond B = P = 930.519 The market price of bond C = P = 1052.716 b). The market price of bond A is less than the face value of Bond. Hence it is at a discount. The market price of bond B is less than the face value of Bond. Hence it is at a discount. The market price of bond C is more than the face value of Bond. Hence it is at a premium. c). The market price of bond B is 930.519. Thus for $930.519 the number of bond issued = 1 For 465260 the number of bond issued to Jasmine will be = 465260/930.519 = 500 Conclusion Thus all the three questions regarding Portfolio Valuation, Bond valuation, and Share valuation have been solved. In the first question it was found that as the correlation between the two shares is negative thus investing in both the shares can lead to less risky portfolio. In the second question the market price of each bond was calculated and it was found that the market price of Bond A is the least while the market price of Bond C is the highest. In the third question, the market price of the share for different scenarios were calculated and it was found that SuperGrowth has the highest market price. Recommendations Based on the calculations above, In case of Portfolio Valuation, if the investor wants a less risky portfolio he must invest a greater amount in share Jay but if the investor wants higher returns than he must invest a greater amount in share Kay. Also a mixed portfolio will result in higher return and less risky portfolio. In case of Bond Valuation, if the investor wants to purchase a new bond then must purchase Bond A as it is currently at a discount. Whereas if he has the bonds and is looking to sell then he must sell bond C as it is currently at a premium. In case of Share valuation, the investor should invest in SteadyGrowth as the growth rate and the dividend pay by the company is the highest among all the shares considered. Bibliography Parrino, R, Kidwell, D, Au Yong, H, Morkel-Kingsbury, N, Dempsey, M Murray, J 2011, Fundamentals of corporate finance, 1st edn, Wiley, Sydney.