FINANCIAL MANAGEMENT

Bond valuation
QUESTIONS

ANNUAL EQUAL COUPON BOND VALUE

Question No. 1
Mr. A is willing to purchase a five years Rs. 1,000 par value bond having a coupon
rate of 9%. A’s required rate of return is 10%. How much Mr. A should pay to
purchase the bond if it matures at par?

Additional information in CMA-PTP:

[Given: PVIFA (10%, 5 years) = 3.791 and PVIF (10%, 5 years) = 0.621]
[Given: PVIFA (9%, 5 years) = 3.890 and PVIF (9%, 5 years) = 0.650]

Ans: Rs. 962.19

Question No. 2
Bright Computers Limited is planning to issue a debenture series with a face value
of Rs. 1,000 each for a term of 10 years with the following coupon rates:
Yearly coupon rate:
Years
1-4 8%
5-8 9%
9 - 10 13%
The current market rate on similar debenture is 15% p.a. The company proposes to
price the issue in such a way that a yield of 16% compounded rate of return is
received by the investors. The redeemable price of the debenture will be at 10%
premium on maturity. What should be the issue price of debenture?
PV @ 16% for 1 to 10 years are: .862, .743, .641, .552, .476, .410, .354, .305, .263, .227
respectively.
Ans: issue Price = 676.29
 Question No. 3
John inherited the following securities on his uncle’s death:
Types of Security No Annual Maturity Yield
s. Coupon % Years (%)
Bond A (Rs. 1,000) 10 9 3 12
Bond B (Rs.1,000) 10 10 5 12
Preference shares C (Rs.100) 100 11 * 13*
Preference shares D (Rs. 100) 100 12 * 13*

*likelihood of being called at a premium over par.

Compute the current value of his uncle’s portfolio.
Ans: Rs. 36,250
Question No. 4
Nominal value of 10% bonds issued by a company is Rs.100. The bonds are
redeemable at Rs.110 at the end of year 5. Determine the value of the bond if
required yield is (i) 5%, (ii) 5.1% (iii) 10% and (iv) 10.1%.
Ans: (i) 129.48; (ii) 128.95;
(iii) 106.207; (iv) 105.80
Question No. 5
An 8.5% bond of Rs. 1000 face value with five years maturity at par and yield to
maturity of 10% has Rs. 954.74 as the current market value. Calculate the price of
the bond and compare it with market price. What action should the holder of
bond take?

PERPETUAL BOND, ZERO COUPON BOND & SEMI ANNUAL COUPON BOND
Question No. 6
Calculate market price of:
(i) 10% Government on Nepal security currently quoted at 110, but interest rate
is expected to go up by 1%
(ii) A bond with 7.5% coupon interest, face value 10,000 & term to maturity of
2 years, presently yielding 6%. Interest payable half yearly.
Ans: (i) Market price = Rs. 99.10 (ii) Market price = Rs. 10,279
Question No. 7
On 1 June 2003 the financial manager of Gadgets Corporation’s Pension Fund
Trust is reviewing strategy regarding the fund. Over 60% of the fund is
invested in fixed rate long-term bonds. Interest rates are expected to be quite
volatile for the next few years.
Among the pension fund’s current investments are two AAA rated bonds:
1) Zero coupon June 2018
2) 12% Gilt June 2018 (interest is payable semi-annually)
The current annual redemption yield (yield to maturity) on both bonds is
6%. The semi-annual yield may be assumed to be 3%. Both bonds have a
par value and redemption value of $100.
Required to estimate the market price of each of the bonds if interest rates
(yields):
(i) increase by 1%;
(ii) decrease by 1%.
[Given PVF (2.5%, 30) = 0.4767, PVF (3%, 30) = 0.412, PVF (3.5%, 30) = 0.3563]
Ans: (i) MV of Zero coup bond = $ 36.25, Gilt = 145.98; (ii) MV of
Zero Coup Bond = $48.10, Gilt = 173.25

Question No. 8
Genpact Ltd. has outstanding a 14% coupon bond with three years to
maturity. Interest payments are made semi- annually. Assume a face
value of Rs. 100.
(a) What would be its price if the bond’s yield were 12%? If it were 15%?
(b) Instead of a coupon bond, suppose it were a zero coupon, pure
discount instrument. If the yield were 14%, what would be the market
price? (Semi-annual compounding)
Ans: (a) Price = Rs. 104.92, Rs. 97.658; (b) Price = 66.63.
VARIABLE COUPON BOND
Question No. 9
ABC Ltd has the following outstanding bond

Bond Coupon Maturity

Series X 8% 10 Years
Series Y Variable changes annually comparable to prevailing rate 10 years

Initially these bonds were issued at face value of Rs. 10,000 with
yield to maturity of 8%. Assuming that:
(i) After 2 year from the date of issue interest on comparable bonds is 10% then
what should be the price of each bond?
(ii) If after 2 additional years the interest on comparable bond is 7%, then what
should be the price of each bond?
(iii) What conclusions you can draw from the prices of bonds computed above
Ans: (i) X = Rs. 8,938; Y = 10,005; (ii) X = Rs. 10,474; Y = R9, 997
iii) Price of bond X moves inversely with change in interest rate, whereas,
price of bond Y does not fluctuate, because coupon rate is adjusted
according to change in interest rate.
YIELD TO MATURITY (YTM) AND HOLDING PERIOD YIELD

Question No. 10
Mr. A had purchased a bond at a price of Rs. 800 with a coupon payment of Rs. 150
and sold at for Rs. 1,000.
(i) What is his holding period return?
(ii) If the bond is sold for Rs. 750 after receiving Rs. 150 as coupon payment,
then what is his holding period return?
Ans: (i) HPR = 43.75%; (ii) HPR = 12.5%

Question No. 11
If the market price of the bond is Rs.95; Years to maturity = 6 years; coupon rate =
13% p.a. (paid annually) and issued price is Rs.100. What is the yield to maturity?
Ans: Approx YTM = 14.18%

Question No. 12
There is a 9% 5-year bond issue in the market. The issue price is Rs. 90 and the redemption
price Rs. 105. For an investor with Marginal income tax of 30% and capital gain tax rate
of 10% ( assuming no indexation), what is the post-tax yield to maturity.
Ans: YTM = 9.49%.
Question No. 13
An investor is considering the purchase of the following Bond:
Face value Rs.100
Coupon rate 11%
Maturity 3 years
i. If he wants a yield of 13% what is the maximum price he should be ready to pay for?
ii. If the Bond is selling for 97.60, what would be his yield?
Ans: i. = 95.27 ii. 11.94%
Question No. 14
Based on the credit rating of bonds, Mr. Z has decided to apply the following
discount rates for valuing bonds: Credit Rating Discount Rate
AAA 364 day T bill rate + 3% spread
AA AAA + 2% spread
A AAA + 3% spread
He is considering to invest in AA rated, Rs.1, 000 face value bond currently selling
at Rs.1, 025.86. The bond has five years to maturity and the coupon rate on the
bond is 15% p.a. payable annually. The next interest payment is due one year from
today and the bond is redeemable at par. (Assume the 364 day T-bill rate to be 9%).
You are required to calculate the intrinsic value of the bond for Mr. Z. Should he
invests in the bond? Also calculate the current yield and the Yield to Maturity
(YTM) of the bond.
Ans: Intrinsic Value = 1033.95; Yes; Current Yield = 14.62%; YTM = 14.23%.

Question No. 15
MP Ltd. issued a new series of bonds on January 1, 2000. The bonds were sold at
par (Rs. 1,000), having a coupon rate 10% p.a. and mature on 31st December, 2015.
Coupon payments are made semiannually on June 30th and December 31st each
year. Assume that you purchased an outstanding MP Ltd. Bond on 1 st March,
2008 when the going interest rate was 12%.
Required:
(i) What was the YTM of MP Ltd. Bonds as on January 1, 2000?
(ii) What amount you should pay to complete the transaction? Of that amount
how much should be accrued interest and how much would represent bonds
basic value.
Ans: (i) YTM = 10%, (ii) Pay 916.669; Accrued int. = 16.45; Basic value as on 1.3.08 = 900
 Question No. 16
On 31st March, 2013, the following information about Bonds is available:
Name of Security Face Value Maturity Date Coupon Coupon
 Rate Date(s)
Zero 10,000 31st March, 2023 N.A. N.A.
coupon T- 1,00,000 20th June, 2013 N.A. N.A.
Bill 100 31st March, 2023 10.71 31st March
10.71% GON 2023 100 31st March, 2018 10.00 31st March & 30th September
10% GON 2018
Calculate:
(i) If 10 years yield is 7.5% p.a. what price the Zero Coupon Bond would fetch on
31st March, 2013?
(ii) What will be the annualized yield if the T-Bill is traded @ 98500?
(iii) If 10.71% GON 2023 Bond having yield to maturity is 8%, what price would it
fetch on April 1, 2013 (after coupon payment on 31st March)?
(iv) If 10% GON 2018 Bond having yield to maturity is 8%, what price would it
fetch on April 1, 2013 (after coupon payment on 31st March)?

YIELD TO MATURITY (YTM) AND HOLDING PERIOD RETURN

YIELD TO MATURITY (YTM) AND HOLDING PERIOD RETURN