Q2. Assume you are the treasurer of Oman Oil Marketing and have O.R 1,000,000 th

Question

Q2. Assume you are the treasurer of Oman Oil Marketing and have O.R 1,000,000 that should be invested for 5 years. You searched the market for potential investment opportunities and identified the following alternatives: 1. A 5-year zero-coupon bond of a maturity value of O.R 1,000 and a current market price O.R 600 2. A piece of property with current market price of O.R 1,000,000 and expected sales value in 5 years of O.R 1,500,000 Instructions: Evaluate both available investment opportunities with respect to return on each and decide on the better alternative

Explanation / Answer

Proposal 1. 5 year zero coupon bond
Market Price = O.R 600/ bond
number of bonds that can be prurchsed with the available amonut = = i,000,000/600 = 1666 bonds
The profit per bond at end of 5 years = O.R (1000-600) = O.R400
hence, total money made = 1666*400 = O.R666,666
Return on investment = 66.66%

Proposal 2. Investment in Property
Amount to be received on maturity = O.R 1,500,000
Amonut of money made at end of 5 years = O.R 500,000
Return = 50%

In both the situations the ampunt of money O.R 1,000,000 initially and the money made is at the end of 5 years. Assuming that the discounting rate for both the proposals remain constant (difference in the geographies, the government, the market situtaion can lead to different opportunity cost i.e. the discounting rate), the Proposal 1. gives better return.
Also, investment in Proposal 1 would be ensure safety of money because its Givernment Bond. The money invested can be redemmed anytime if better investment opportunities are available elesewhere.

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