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Question2 KingSolomonisarichfarmerinTetebia,atownintheAsouMunicipalAssembly.Heownsover 100,000hectaresoffarmlands.However,hefearstheworstmighthappenandwantstodosome investmentstosecurehisfutureandthatofhischildren.Heiscontemplatingsomelong-term investmentshecouldundertaketosecurehisfutureandthatifhischildren.Heisnow50yearsold andheplanstoretirein10yearsfrom activefarm work.Heexpectstoliveforanother25years afterheretiresthatis,untilage85.Hewasadvisedbyafriendthataninvestmentinthefinancial marketwillhelphim planhisretirementwell.Hehasnoideaaboutfinancialmarketsandhowthey operate.Yourecentlygraduatedfrom theSchoolofGraduateStudies,UniversityofProfessional Studies,Accraandhavejustreportedtoworkasaninvestmentadvisoratthebrokeragefirm of CendenLtd.KingSolomonhasapproachedyourcompanyforadvice.Yourboss,afteradiscussion withKingSolomongatheredthefollowinginformation.KingSolomonwantshisfirstretirement paymenttohavethesamepurchasingpoweratthetimeheretiresasGH40,000hastoday.He wantsallofhissubsequentretirementpaymentstobeequaltohisfirstretirementpayment.(Do notlettheretirementpaymentsgrowwithinflation:KingSolomonrealizesthattherealvalueofhis retirementincomewilldeclineyearbyyearafterheretires.)Hisretirementincomewillbegintheday heretires,10yearsfrom today,andhewillthenreceive24additionalannualpayments.Inflationis expectedtobe5%peryearfrom todayforward.HecurrentlyhasGH100,000savedup,andhe expectstoearnareturnonhissavingsof8%peryearwithannualcompounding. Again,hewantstohaveasecureduniversityeducationforhislovelydaughter,Daisy.Hisdaughter isnow13yearsold.SheplanstoenrollattheUniversityofProfessionalStudies,Accra,in5years, anditshouldtakeher4yearstocompletehereducation.Currently,thecostperyear(foreverything herfood,clothing,tuition,books,transportation,andsoforth)isGH12,000peryear.Thiscostis expectedtoremainconstantthroughoutthefour-yearuniversityeducation.Thedaughterrecently receivedGH7,500from hergrandfathers(KingDavids)estate;thismoneywillbeinvestedata rateof8%tohelpmeetthecostsofDaisyseducation.Therestofthecostswillbemetbymoney KingSolomonwilldepositinasavingsaccount,whichwillalsoearn8percentcompoundinterest peryear.Hewillmake5equaldepositsintotheaccount,onedepositperannum startingoneyear from nowuntilhisdaughterstartsuniversity.Thesedepositswillbeginoneyearfrom now.(Assume thatschoolfeesarepaidatthebeginningoftheyear). Again,KingSolomonisinterestedinbuyingabondissuedbyZenzoPharmaLtd.ZenzoPharma intendstousetheproceedsofthebondstofinancetheproductionofitsnewvaccineforCOVID19. ThebondhasafacevalueofGH10,000atacouponrateof12%andaterm tomaturityof10years. Thebondexpectstopaycouponsannually.Includedinthebondindenturearecallandsinkingfund provisions.Therequiredrateofreturnonthemarketforbondswithsimilarfeaturesis18% per annum.YourbosshadaskedyoutoadviceKingSolomonbasedontheinformationheprovided. DC:ACD01-F004 Required a.ExplaintoKingSolomonwhatfinancialmarketsmeanandwhichthree(3)financialinstruments hecaninvestin. (4 marks) b.Tothenearestcedi,how muchmusthesaveduringeachofthenext10years(withequal depositsbeingmadeattheendofeachyear,beginningayearfrom today)tomeethis retirementgoal?(Note:Neithertheamounthesavesnortheamounthewithdrawsupon retirementisagrowingannuity.) (5marks) c.Whatwillbethepresentvalueofthecostof4yearsofeducationatthetimethedaughterDaisy turns18? (2marks) d.WhatwillbethevalueoftheGH7,500thatDaisyreceivedfrom hergrandfathersestatewhen shestartscollegeat18? (2marks) e.IfKingSolomonisplanningtomakethefirstof5depositsoneyearfrom now,howlargemust each deposit be for him to be able to finance his daughters college education? (2marks) f. ExplaintoKingSolomonwhatcallprovisionsandsinkingfundprovisionsareandhow these provisions are expected to affect the risk of the bond (2marks) g.WhichvaluewillyouplaceonabondofZenzoPharmaLtd? (3 marks) Total:20marks

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