FIN 650 Mini case Sam Strother and Shawna Tibbs/TUTORIALOUTLET DOT C FIN 650 Mini case Sam Strother and Shawna Tibbs/T

FIN 650 Mini case Sam Strother and Shawna Tibbs
FOR MORE CLASSES VISIT
www.tutorialoutlet.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.
a. What are the key features of a bond?
b. What are call provisions and sinking fund provisions? Do these
provisions make bonds more or less risky?
c. How does one determine the value of any asset whose value is
based on expected future cash flows?
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 is 10%?
e. (1) What would be the value of the bond described in part d if, just
after it had been issued, the expected inflation rate rose by 3
percentage points, causing investors to require a 13% return? Would
we now have a discount or a premium bond?
(2) What would happen to the bond’s value if inflation fell and rd
declined to 7%? Would we now have a premium or a discount bond?
(3) What would happen to the value of the 10-year bond over time if
the required rate of return remained at 13%? If it remained at 7%?
(Hint: With a financial calculator, enter PMT,I/YR,FV,andN, and