Select Business and Technology College

Department of Accounting
Individual Assignment on Investment and
portfolio management
By
Rahel Hailu
1839/12

Submitted to: Ins. Agumase

Addis Ababa, Ethiopia
Individual Assignment on Investment and portfolio management
Select business and Technology College
Department of Accounting & Finance
Individual Assignment on Investment and portfolio management
1. A bond Birr 1000 is issued at par carrying coupon rate of interest of 10 percent.
The bond matures after 6 years. The bond is currently selling for Birr 850. What is
the YTM on this bond? Further Compute with Linear interpolation and
Approximation.
The yield to maturity is the value of r that satisfies the following equality.
6
100 100 0
Birr 850 = ∑ (1+ r)
t +
(1+r )
6
t =1

Try r = 4%. The right hand side (RHS) of the above equation is:
Birr 100 x PVIFA (4%, 6 years) + Birr 1,000 x PVIF (4%, 6 years)
= Birr 100 x 0.952 + Birr 1,000 x 0.746
= Birr 841.2
Try r = 5%. The right hand side (RHS) of the above equation is:
Birr 100 x PVIFA (5%, 6 years) + Birr 1,000 x PVIF (5%, 6 years)
Birr 100 x 0.961 + Birr 1,000 x 0.790

= Birr 886.1
Thus the value of r at which the RHS becomes equal to Birr 850 lies between 4% and 5%.

Using linear interpolation in this range, we get

Yield to maturity = 4% + [ 886.1−841.2 ]

8 86.1−8 50.0
× 1%

= 4% + .8% = 4.8%

2. A Birr 2500 par value bond bearing a coupon rate of 12 percent will mature after
seven years. What is the value of the bond, if the discount rate is 10 percent?
Solution:
Using the formula:
B = PV of annuity + PV of lump sum
B = 100[1 – 1/(1.12)7] / .12 + 2,500 / (1.12)7

B = 456.37 + 1130.87 = 1587.24

Individual Assignment on Investment and portfolio management
3. An investor expects to get Birr 3.00, 5.00 and 7.00 as dividends from a share for
next three years respectively and a sale price of Birr 125 at the end of the third
year. If his required rate of return is 15 percent, what is the intrinsic value of the
share?
Solution:
D1 D2 D3 P
Po = + + + 3
(1+r ) (1+r ) (1+r ) (1+r )
3 5 7 125
= (1+0.15) + (1+0.15) + (1+0.15) + (1+0.15)

= 2.6 + 4.34 + 6.08 + 108.7

= 121.72
4. A company’s Earnings per Share (EPS) is Birr 9.50 if the P/E ratio is 13, then what is
the intrinsic value of the share?
Solution:

Share Price = EPS x P/E ratio = 9.50 x 13 = Birr 123.50