Question

Heather Corporation bonds have 7 years remaining to maturity. The bonds have a par value of RM1,200 and its market price is RM1100. The company pays interest annually and has a 9 percent coupon rate. Calculate the current yield. (5 marks) (b) Mr Ariff is considering investing in two shares, X and Y. The following cash flow for both share: Assuming a 20 percent interest rate, calculate the future value each investment and recommend the best alternatives for Mr Ariff to select. (10 marks) (c) From your understanding, briefly explain financial management and the importance of it.

Answer 1

To calculate the current yield of Heather Corporation bonds, divide the annual interest payment by the market price of the bond. Investment Y is the better alternative as it provides a higher return. Financial management involves making decisions about how to raise and allocate funds, manage risks, and achieve financial goals.

Step-by-step explanation:

To calculate the current yield of Heather Corporation bonds, we need to divide the annual interest payment by the market price of the bond and multiply by 100 to get a percentage. The annual interest payment can be calculated by multiplying the coupon rate of 9% by the par value of RM1,200, which gives us RM108. The current yield is (RM108/RM1100) x 100 = 9.82%.

(b) To calculate the future value of investments X and Y, we use the formula: Future Value = Present Value x (1 + interest rate). For investment X, the future value would be RM1,000 x (1 + 0.20) = RM1,200. For investment Y, the future value would be RM1,500 x (1 + 0.20) = RM1,800. Based on the future values, investment Y would be the better alternative as it provides a higher return.

(c) Financial management refers to the planning, organizing, and controlling of a company's financial resources. It involves making decisions about how to raise and allocate funds, as well as how to manage risks and achieve financial goals. Financial management is important because it helps businesses make informed decisions about their finances, ensuring that they are utilizing their resources effectively and maximizing their profitability.