VALUATION

| December 9, 2015

Sam Gonzalez and Ricardo Julio are vice presidents of Mutual Insurance company and co-directors of company%u2019s pension fund management division. An important new client has requested that Mutual Insurance Company present and investment seminar to the mayors of the presented cities, Sam and Ricardo, who will make an actual presentation, have asked you help them by answering the following questions:

a. How does one determine the value of any asset whose value is based on expected future cash flows?

b. What would be the value of bond 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 know have a discount or a premium bond?

c. What would happen to the value of bon in part d if inflation fell and rd declined to 7%? Would we know have a discount or a premium bond?

d. What would happen to the value of bon in part d over the time if the required rate of return remained 13%? If it remained at 7%?

e. What is the yield to maturity on a 10 year,9% annual coupon, $1,000 par value bond sells at $887? That sells at $1,134.20? What does the fact that a bond sells at discount or at a premium tell you about the relationship between rd and the bond%u2019s coupon rate

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