Marketing assignment

Instructions:

· This Assignment must be submitted on Blackboard (WORD format only) via the allocated folder.

· Email submission will not be accepted.

· You are advised to make your work clear and well-presented; marks may be reduced for poor presentation. This includes filling your information on the cover page.

· Assignment will be evaluated through BB Safe Assign tool.

· Late submission will result in ZERO marks being awarded.

· The work should be your own, copying from students or other resources will result in ZERO marks.

· Use Times New Roman font 12 for all your answers.

Assignment Questions

Q1. Suppose Abdulrahman Plan to borrow a loan of SAR 120,000 now and will repay it in 10 equal annual installments. If the bank charges 10% interest, What will be the amount of the annual installment? (1 Mark)

Answer 1:

Loan principle amount 120,000

Years of payment (n) 10 years

Interest (r) 10%

Annual payments = (r(p))/(1-(1+r) ^-10

= (0.1*(120,000))/ (1-(1+0.1) ^-10)

= 19,529.44

Amount of the annual installment is 19,529.44

Q2. Briefly discuss the Time Value of Money concept? (1 Mark)

Answer 2:

The idea is that money tend to lose its value over time, thus making it more desirable to have money now as opposed to later. The aspects that affect money making it lose its value over time is inflation, because inflation tends to reduce its buying power. Doing so therefore results in greater cost of receiving money in the future as opposed to receiving it now. In essence, time value of money concept strives to incorporate the various considerations into money decisions through the facilitation of a more objective evaluation of its associated cashflows in regards to the different time periods. It thus entails the conversion of present or future values to their equivalents to facilitate effective comparison.

Q3. Ahmed has been offered a 10-year bond issued by Homer, Inc., at a price of $800. The bond has a coupon rate of 7 percent and pays the coupon semiannually. Similar bonds in the market will yield 10 percent today. (2 Marks)

a. What should be the price of this bond?

b. Should Ahmed buy the bonds at the offered price?

Answer 3:

1. What should be the price of this bond?

FV = $800

CF = 7/2 = 3.5 %

C= 3.5*800= 28 per period

N = 10 x 2 = 20 periods for semi-annual coupon payments

t= 10

value = 28((1- (1/1.05) ^20))/0.05)) + 800/ (1/1.05) ^20)

= 28* (15.37245103) + (185.1019589)

The price of the bond should be 1,011.37

1. Should Ahmed buy the bonds at the offered price?

Ahmed proceed to buy the bonds as the is discounted, the above calculation reflect that the bond is currently trading for less than its actual face value in the secondary market.

Q4. Suppose a 3 year bond with a 6% coupon rate that was purchased for $760 and had a promised yield of 8%. Suppose that interest rates increased and the price of the bond declined. Displeased, you sold the bond for 798.8 after having owned it for 1 year. What should be the realized yield ?

(1 Mark)

Answer 4:

Face value of Bond = $1,000

Annual coupon rate = 6%

Coupon amount(C) = 6%*1000 = $60

Purchase price = $760

Selling price = 798.8

Promised yield= 8%

n= a 3-year

Realized yield = (Vt+C/Vo) ^1/t -1

Realized yield = (798.8+60/760) ^1/1-1

Realized yield = (1.13) -1

Realized yield = 13%

r = 16%