Business Finance-1 (FIN506)

Weekly Assignment # 3

Instructor: Sana Tauseef

Semester: Fall 2021
Due Date: September 19, 11 p.m.

1. Define the following:

a. Liquidity Risk
b. Coupon Payment
c. Sinking Fund
d. Zero-coupon bonds
(8-10 lines)

2. How do the rating agencies facilitate the bond issuing firms and potential bond investors?
(4-5 lines)

3. Read the instrument rating criteria and rating scales given on PACRA’s website.
(http://www.pacra.com.pk/uploads/doc_report/PACRA_Methodology_Debt
%20Instrument_June18.pdf)
a. What is the best and the worst long-term rating which PACRA assigns to debt
instruments?
b. What are the different factors which PACRA considers in assigning its rating?
(6-8 lines)

4. Based on the PRAT model, what are the various determinants of a company’s sustainable
growth? Discuss how each of these components impacts the company’s growth rate?
(8-10 lines)

5. Following are the expected inflation figures for next 3 years.

Year Inflation
1 4%
2 4.5%
3 6%
a. If the risk-free rate is 1.5%, compute the following.
i. 1-year rate
ii. 2-year rate
iii. 3-year rate
iv. 2nd year rate
v. 3rd year rate
b. If the 4-year rate is 8%, what is the expected inflation for year 4?