- 12 Marks
AFM – May 2017 – L3 – Q2a – Discounted cash flow techniques
Use Macaulay duration method to choose the best bond option for ABE based on recovery period.
Question
ABE has surplus cash which can be invested for at least five years. The company has consulted you to help them choose an investment that gives the shortest recovery period. The company presented the information on two types of bonds as follows:
| Bond | Redemption | Nominal Value (GH¢) | Redemption Value | Coupon Rate (%) | Price (GH¢) |
|---|---|---|---|---|---|
| A | 5 years | 1,000 | At par | 7.00 | 950 |
| B | 6 years | 1,000 | 5% premium | 7.50 | 1,010 |
Required:
Use the Macaulay Duration method to advise ABE on the best bond option to select for their investment. (12 marks)
Find Related Questions by Tags, levels, etc.
- Tags: Bond duration, Bonds, Investment decisions, Macaulay duration, Risk Management
- Level: Level 3
- Topic: Discounted cash flow techniques
- Series: MAY 2017