Reference no: EM132908144
In 2004 Valia purchased a 20-year, 1.50% p.a. semi-annual paying coupon bond with a Face Value (FV) of $1 000 000, as she was attracted by the fixed income stream in order to fund her retirement expenses.
a) What is the price of this bond in 2020 (4 years remaining) at a current market interest rate of 2.70% p.a.? Show formula, variables, calculation, and a concluding statement in your response.
b) Is Valia's coupon bond currently selling at a premium, par, or discount? Describe the relationship between bond prices and interest rates.
c) Valia decided to sell the bond from part a) and is considering her investment options. A friend suggested that she invests the proceeds by buying shares. Explain two advantages shares have compared to bonds.
d) Warren, a Wall Street portfolio manager, informed Valia that she should consider investing in his portfolio instead. He said his fund is perfect for someone who is retired and looking to increase her wealth to fund her retirement lifestyle. His portfolio has the following allocation of assets:
Asset Class Allocation
Shares in Small Companies (High Risk) 60%
Shares in Blue Chip Companies (Low Risk) 30%
Bonds 10%
Cash 0%
Does Warren have a point? Why or why not?
e) Valia decides to pass on $1 000 000 of her savings for her child Tony, who is currently 20 years old. Should Tony invest in mostly bonds, like his Mum? Suggest an option Tony can consider when investing his money. Explain why your choice is appropriate for Tony.
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