Introduction To Financial Management - Assignment 1(1).docx - Question 1(a i Loan = $5,600,000 70 = $3,920,000 Number of payments= 30 12 = 360 Period

Introduction To Financial Management - Assignment 1(1).docx...

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Question 1 (a) i. Loan = $5,600,000 * 70% = $3,920,000 Number of payments= 30 * 12 = 360 Period interest rate = APR/ number of periods per year = 6% /12 = 0.5% $3,920,000 = Monthly payment [1 – 1 / 1.005^360]/0.005 Monthly payment = $23502.38 ii. FV = PV (1 + r) ^t – C [(1+r) ^t-1] / r = 3,920,000 * 1.005^360 – 15,000(1.005^360-1)/0.005 = 8540769.195 (b) 1. Life expectancy: A viatical settlement providers only profit when a policy seller passes away. For this reason, viatical settlement is more valuable if the seller has a shorter life expectancy. Therefore, the longer the life expectancy, the cheaper the policy. However, because of the time value of money, the longer the person lives, the lower the return. 2. Cost of keeping the policy in force (expected future premiums): A viatical settlement has a higher cash payout to the policyholder due to the lowered projected costs of the viatical settlement company keeping the policy in force. 3. Policy size: The larger the policy benefit, the more valuable the life viatical settlement will be. 4. Policy type: The policies include whole life, universal life, term life or group life
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Unformatted text preview: insurance policy that is convertible into one of those types of permanent policies. Different types have different risks to the investor, so higher the risk, the more valuable the viatical settlement. Question 2 (a) Expected return for stock M : E(M) = 0.19 * (-12.2%) + 0.59 * 8% +0.22 * 21% = 7.022% Expected return for stock N : E(N) = 0.19 * 10.5% + 0.59 * 13% +0.22 * (-12%) = 7.025% Expected return for the portfolio : E(P) = 70% * 7.022% + 30% * 7.025% = 7.0229% (b) Standard Deviation for stock M : SD(M)^2 = 0.19 * (-12.2%-7.022%) ^2 + 0.59 * (8%-7.022%) ^2 +0.22 * (21%-7.022%) ^2, SD(M) = 0.106654 Standard Deviation for stock N : SD(N)^2 = 0.19 * (10.5%-7.025%) ^2+ 0.59 * (13%-7.025%) ^2 +0.22 * (-12%-7.025%) ^2, SD(N) = 0.101482 Standard Deviation for the portfolio : SD(P)^2 = 70% * (7.022%-7.0229%) ^2 + 30% * (7.025%-7.0229%) ^2, SD(P) = 0.000014 (c) I would choose the portfolio, because the expected returns of these choices are very close, but the portfolio has the smallest standard deviation, which means it has the least risks....
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