King’s Business School, King’s College London

Cover Sheet for King’s Business School 23/24

Candidate ID: AE 39770

Module Code: 7QQMM203

Module Name: Principles of Finance

Word Count: 870

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 Question I Candidate No
-: AE39770 .

a) Bond is a financial instrument for corperates firms ,

and
government
debt When bonds bonds
to issue .

they issue to investors ,

they treat as

a contract that receives a

lump-sum amount of
berrowing from investors at first
,

of from
then
they were
legally to binded
pay
interest (in terms
compen payments) to investors

back band
time to time , and
eventually repaying the principal to investers when the

matures
. Therefore ,
from The
perspective of a firms the face value of the bend equals
the principal of debt the firm wants to borrow from bendhelders per unit of bend.
From the of bendholder (invester) the of a bend should equals
price
a
perspective ,

the value of flow the bead which equals the

present expensed cash
generated by ,
present
of of future discounted of the face
payments plus
value the sum all the value
compen ,

value of a bend
.

Given that the fixed each time is C and the face

coupen payment ,

value of the bend is F, Assume the band is compounded annually; and the term

structure of interest rate is flat such that ri = =

r3 =... =
r
=
r

22
o + +
F
(B) Fair
price
of bond = cot +
Hersh
+
s
...

very
where n =
tenor of the bend, and C = C =
G =
...
:
Cy =
C ,
and r = annual interest rate

By simplification ,
PB =
C (If ir +pirer +
chris +
...
+
chryu) +
c rm

Using the
annuity -
formula
I
,
we have

I
n= ,
Cleryn
·

C=(t-rcirsn) · C

↓ Fair
price
of bend LPBS = Lv -

riversal C +
pirs ·
F

For an investor, if the cost of investment is smaller than the present value

of cashflow the investment the investment profitable and invester

can
generate , is

should invest
.
 As there is no further information about the risk levels of the investments

in Stock (1) and stock (2) ,

I would consider
maximising
return for the portfolio .

A higher return when believed be underpriced

stack can
generate expected one is to more

in the current market

Since there is we information about the current market prices of Stock A and

decide
my perifoli
B, I could not which stacks to be more
hearty weighted in .

whichever the stock is more underpriced I would invest more in it.

However, if the between And

Bexcept from that
everything were same stack Stock B
generate
dividend but stock A does not It is indifferent for to invest in either
growing . me

higher of dividents from stock B offsetted

stocks as the
present value is
by the higher
of
price stock B, where
D/Cr-g) > Dir ,
assume that both stocks
gives
the same

dividend So , for diversification I would equal stock A

s
payment risk
purpose , put weights on

and B (50 % each) in

perefore .
my