An investor borrows a principal of £1,000,000 and agrees to an interest-only repayment at a rate of 5% p.a., in equal quarterly installments, paid in arrears for 10 years. After 10 years the principal is paid back with a lump payment. The investor uses part of the principal to buy £200,000 nominal of 10-year government bonds, paying semi-annual coupons at a rate of 4% p.a. and producing a yield of 3.5% p.a. effective. Bonds are redeemed at par after 10 years. The remaining portion of the principal (denoted by P) is used to purchase properties that produce annual rental income at a rate of 4% of their initial value P for the first 5 years and, subsequently, at a rate of 5% of their initial value P. Rent is payable monthly in advance. (a) Evaluate the present value at time zero of the total liability. Let ir = 4% p.a. be the annual effective rate applied to liabilities. (b) Compute the present value at time zero of the portion of principal invected in bends and deduce the invectment in pronertios P
An investor borrows a principal of £1,000,000 and agrees to an interest-only repayment at a rate of 5% p.a., in equal quarterly installments, paid in arrears for 10 years. After 10 years the principal is paid back with a lump payment. The investor uses part of the principal to buy £200,000 nominal of 10-year government bonds, paying semi-annual coupons at a rate of 4% p.a. and producing a yield of 3.5% p.a. effective. Bonds are redeemed at par after 10 years. The remaining portion of the principal (denoted by P) is used to purchase properties that produce annual rental income at a rate of 4% of their initial value P for the first 5 years and, subsequently, at a rate of 5% of their initial value P. Rent is payable monthly in advance. (a) Evaluate the present value at time zero of the total liability. Let ir = 4% p.a. be the annual effective rate applied to liabilities. (b) Compute the present value at time zero of the portion of principal invected in bends and deduce the invectment in pronertios P
Chapter19: Lease And Intermediate-term Financing
Section: Chapter Questions
Problem 20P
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