FIN650 CLC - mini case 3

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School
Grand Canyon University **We aren't endorsed by this school
Course
FIN 650
Subject
Finance
Date
Oct 18, 2023
Pages
1
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Sam Strother and Shawna Tibbs are vice presidents of Mutual of Seattle Insurance Company and co-directors of the company's pension fund management division. An important new client, the North-Western Municipal Alliance, has requested that Mutual of Seattle present an investment seminar to the mayors of the represented cities, and Strother and Tibbs, who will make the actual presentation, have asked you to help them by answering the following questions. c. How does one determine the value of any asset whose value is based on expected future cash flows? By using the discounted cash flow method, the value of any asset would be determined in which the value of any asset would be based on the expected future cash flows. This is determined through the computation of the present value of all expected cash flows using a premeditated discount rate (Smith, 2020). In the provided scenario, the discount rate would be the rate of return or the opportunity cost of capital. The worth of the asset is equivalent to the present net value of all future cash flows, which then provides the present value of the asset. d. How is the value of a bond determined? What is the value of a 10-year, $1,000 par value bond with a 10% annual coupon if its required rate of return is10%? The value of a bond is relative to its maturity which has a valuable effect on its pricing. The bond value is determined by calculating the present value of the bond's cash payments discounted at the bond's market rate (Ross, 2020). In order to acquire the price of the bond, the present value of coupon payments will be added with the present value of bond at the maturity year. The calculations for the provided scenario is as follows: Price of bond = PMT*(1-(1/(1+^n)))/r + (face value/(1+r)^n) = 100 * (1-(1/(1.1^10)))/0.1 + (1000/1.1^10) = $614.46 + $385.45 Price of bond = $1,000 Reference: Ross, S. (2020). How bonds are priced. Investopedia. Retrieved on June 15, 2020, from https://www.investopedia.com/ask/answers/112614/what-determines-price-bond-open- market.asp Smith, T. (2020). Asset valuation. Investopedia. Retrieved on June 15, 2020, from https://www.investopedia.com/terms/a/assetvaluation.asp
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