Reference no: EM133544802
Problem
Background
You have been working as the chief financial planner for a large company based in Melbourne. Your clients include individuals, government, and private organizations. One of your clients, Peter Silva is 35, is married and has a 5-year-old son. He is employed as a schoolteacher and has recently inherited $800,000 from his father who recently passed away. Peter currently has a balance of a loan amounting to $150,000 to be paid off after 10 years. The current interest rate on this loan is 5%. Although young, unlike many other investors, Peter does not want to take a lot of risk by investing his inheritance in the stock market due to large losses of value of stocks recently. Peter is interested in investing in corporate bond market. His main goal is to accumulate funds for his child's university education, for his retirement at the age of 60 pay off the balance on his housing loan
Project Brief
Considering Peter's goals and his attitude towards risk you have decided to invest in AAA rated bonds. You have selected 25-year coupon bonds, 25-year zero coupon bonds and perpetual bonds for Peter's bond portfolio. The coupon bonds pay a coupon rate of 8%. A zero-coupon bond is currently selling at $535. The coupon rate on perpetual bonds is 7%. Peter wants to invest equal amounts in each of the above bond categories after deducting the present value of the loan payable in 10 years from his inheritance. Yield to maturity of coupon bonds and perpetual bonds is currently 8.5%. All bonds pay coupons annually.
Funding son's education
Peter expects to sell 25% of his investment in coupon bonds after 12 years to pay for his son's university education. You believe in 12 years coupon bonds will sell at a yield to maturity of 9.5% and coupons can be invested in short-term securities at a rate of 8%.
Advise Peter on how much he will get by selling coupons bonds to pay for his son's university education.
You predict that the interest rate on a savings deposit would be 8% per annum after 12 years. Peter wants to enrol his son in a three-year bachelor's degree.
Advise Peter on how much is available to pay for the tuition fees and other expenses of his son in equal amounts annually from the beginning of the first year of his son's degree program.