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Mr Mapimpi has received R475 000 from his man of the match performances during the 2019 Rugby World Cup. He would like to invest the money for his retirement and his financial advisor, Mr Erasmus has advised him that with the current uncertainty in financial markets due to Brexit and trade wars, that bonds would offer the best returns and stability. Mr Erasmus has suggested that Mr Mapimpi purchase bonds in Conversion Limited.
Conversion Limited offers R15 000 par value bonds, with 25 years to the maturity date. The bonds pay a coupon rate of 14% per annum. Interest on the bonds is paid quarterly. The current annual required rate of return is three-fifths (3/5) of the coupon percentage (%) per annum.
You can assume that all transactions occurred at market value on the specific days. Mr Mapimpi wants to buy the maximum number of bonds he can afford.
Required:
1. Calculate the total profit/loss that Mr Mapimpi would make upon sale of the bonds if he purchased them today but then urgently needed to sell them in ten years' time in order to pay for his children's first year varsity and residence fees, assuming that the annual required rate of return has increase by 2% from when he first purchased the bond due to heightened global risks.
2. One of Mr Mapimpi's friends recently heard that he would receive R5 000 a year for the foreseeable future from a family member. He would like to invest this money in an annuity for period of 6 years at 8% interest per annum. The investment gives him the option to choose whether the investment should be an annuity or an annuity due. With aid of calculations advise him what option to choose.
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