School

Grand Canyon University **We aren't endorsed by this school

Course

FIN 650

Subject

Finance

Date

Oct 18, 2023

Pages

1

Uploaded by artabs on coursehero.com

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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