FSTI Holdings has 4 major investments in its portfolio, and you have been asked to determine their current market value. Its holdings are as follows 1. It purchased an annuity from Best Finan

FSTI Holdings has 4 major investments in its portfolio, and you have been asked to determine their current market value. Its holdings are as follows

1. It purchased an annuity from Best Financial 5 years ago. At that time, it paid a lump-sum of $10 million, and in return, FSTI was promised a monthly payment of $100,000, for a total of 15 years from date of purchase.
 

Note: For this annuity, like most financial products, payments are paid/received at the end of the period ("payment in arrears"). In that case, the "Type" field in the Excel formula has a value of 0, or can be left blank.

2. It owns 250,000 shares of Cornwall Systems, for which it paid $15 per share in 2003. Cornwall’s dividend has been growing at a steady rate of 2.8% per year. Given the somewhat risky nature of the company’s business model, the market’s required return on its shares is 8.5%.

3. Last week, it bought $50 million (par value) of newly issued 10-year U.S. Government Treasury Notes. They were purchased at par (i.e., exactly the principal amount), and have a 1.7% coupon rate, paid annually. (Hint: Bonds only trade at par when the coupon rate is exactly equal to its required return.)

4. Two years ago, it entered into a 7-year interest-rate swap agreement, with a $25 million notional amount, under which it pays Morgan Trust a fixed rate of 4.2%, and receives 3-month LIBOR. Payments are made quarterly.

Assignment:

Calculate the current value of each of these holdings, using the following assumptions.

1. FSTI was just offered a new 10-year, $50 million annuity from Best Financial, paying $506,225.75 per month. (Hint: Use the terms of this offer to calculate the current market rate.)

2. Cornwall Systems has recently gone private, and thus does not have a quoted market price per share. However, it continues to pay dividends regularly, and its most recent dividend was $1.70, and is still expected to grow at 2.8% per year. However, as a privately-held company, an additional liquidity premium of 1.5% needs to be added to its required return.

3. The Consumer Price Index report issued this morning suggests that inflation will be 0.1% lower than the market had been previously expected. 10-year Treasury Notes are now trading with a yield of 1.65%.

4. 5-year interest rate swaps are now being quoted at 3.2% (pay fixed, receive 3-month LIBOR; payments made quarterly), and 7-year interest rate swaps at 3.8% (pay fixed, receive 3-month LIBOR; payments made quarterly). (Hint: Calculate the dollar-amount of contractual fixed payments to Morgan Trust under the swap agreement.)
 

Note: Assume the floating-rate portion is exactly at market, i.e., no gain or loss in value, and will continue to be regardless of market changes. Thus, only the fixed-rate portion is subject to price change.