King Solomon is a rich farmer in Tetebia, a town in the Asou Municipal Assembly. He owns over 100,000 hectares of farmlands. However, he fears the worst might happen and wants to do some investments to secure his future and that of his children. He is contemplating several long term investments he could undertake to secure his future and that if his children. He is now 50 years old and he plans to retire in 10 years from active farm work. He expects to live for another 25 years after he retires –that is, until age 85. He heard about an investment in the financial market will help him plan his retirement well. He has no idea about financial markets and how they operate. You recently graduated and have just reported to work as an investment advisor at the brokerage firm of Cenden Ltd. King Solomon has approached your company for advice. Your boss after a discussion with King Solomon could gather the following information. King Solomon wants his first retirement payment to have the same
Again, he wants to have a secure university education for his lovely daughter Daisy. His daughter is now 13 years old. She plans to enroll at the University of Professional Studies, Accra in 5 years, and it should take her 4 years to complete her education. Currently, the cost per year (for everything – her food, clothing, tuition, books, transportation, and so forth) is GH¢ 12,000 per year. This cost is expected to remain constant throughout the four-year university education. The daughter recently received GH¢ 7,500 from her grandfather‟s (King David‟s) estate; this money will be invested at a rate of 8% to help meet the costs of Daisy‟s education. The rest of the costs will be met by money King Solomon will deposit in a savings account which also earns 8 percent
Your firm also serves as the investment adviser for Zenzo Pharma Ltd which intends to issue bonds to finance the production of its new vaccine. The bond has a face value of GH¢10,000 at a coupon rate of 12% and a term to maturity of 10 years. The bond expects to pay coupons semi-annually. Your firm however insists on Zenzo Pharma including a call and a sinking fund provision in the bond indenture. The required rate of return on the market for bonds with similar features is 18% per annum.
Required;
a. What will be the value of the GH¢ 7,500 that Daisy received from her grandfather‟s estate when she starts college at age 18?
b. If King Solomon is planning to make the first of 5 deposits one year from now, how large must each deposit be for him to able to put his daughter through college?
c. Explain to King Solomon what call provisions and sinking fund provisions are and how these provisions are expected to affect the risk of the bond
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