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BONDS

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34 views5 pages

BONDS

Uploaded by

Sushma
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as XLSX, PDF, TXT or read online on Scribd
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VALUE OF BOND PRINCIPAL INSTALLMENT REPAID EVERY YEAR

A COMPANY PROPOSES TO SELL 10 YEAR DEBENTURE OF RS 10,000 EACH. THE


COMPANY WOULD REPAY RS 1000 AT THE END OF EVERY YEAR AND WILL PAY
INTEREST ANUALLY AT 15% ON THE OUTSATNDING AMOUNT. DETERMINE
THE PV OF THE DEBENTURE ISSUE, IF THE CAPITALIZATION RATE IS 18%

STEP 1 CASH OUT FLOW AT THE END OF EACH YEAR 2


YEAR OPENING BALANCE
1 10,000
2 9,000
3 8,000
4 7,000
5 6,000
6 5,000
7 4,000
8 3,000
9 2,000
10 1,000
15%
3=15% X 2 4 5=3+4 6 7
INTEREST REPAYMENT CASH INFLOW =INTEREST + PRINCIPAL PV@18% DCF
1500 1000 2500 0.847458 2118.644
1350 1000 2350 0.718184 1687.733
1200 1000 2200 0.608631 1338.988
1050 1000 2050 0.515789 1057.367
900 1000 1900 0.437109 830.5075
750 1000 1750 0.370432 648.2552
600 1000 1600 0.313925 502.2801
450 1000 1450 0.266038 385.7553
300 1000 1300 0.225456 293.0929
150 1000 1150 0.191064 219.7241
9082.34 PV OF DEBENTURE OR INTRINSIC VAL
BENTURE OR INTRINSIC VALUE
CURRENT MARKET PRICE DURATION AND VOLATILITY

THE FOLLOWING DATA ARE AVAILABLE FOR BOND

FACE VALUE COUPON RATE YEARS TO MATURITY REDEMPTION VALUE YIELD TO MATURITY
1000 16% 6 1000 17%

WHAT IS THE CURRENT MARKET PRICE DURATION AND VOLATILITY OF THIS BOND?

COMPUTATION OF DURATION BY PRODUCT METHOD


1 2 3 4=2*3 5=1*4
YEAR CASH FLOW PVF @17% DCF@17% TDCF
1 160 0.854700854700855 136.752136752137 136.752136752137
2 160 0.730513551026372 116.882168164219 233.764336328439
3 160 0.624370556432796 99.8992890292474 299.697867087742
4 160 0.533650048233159 85.3840077173055 341.536030869222
5 1160 0.456111152336034 529.088936709799 2645.44468354899
TOTAL 968 3657.19

DURATION =TDCF/DCF=3657.19/968=4.24 YEARS

COMPUTATION OF DURATION BY PROPORTION METHOD


1 2 3 4=2*3 5
YEAR CASH FLOW PVF @17% DCF@17% % OF TDCF
1 160 0.854700854700855 136.752136752137 14.1272868545596
2 160 0.730513551026372 116.882168164219 12.0746041491962
3 160 0.624370556432796 99.8992890292474 10.3201744864925
4 160 0.533650048233159 85.3840077173055 8.8206619542671
5 1160 0.456111152336034 529.088936709799 54.6579480072106
TOTAL 968 100%
INTEREST 1000*16%=160

6=5*1
DURATION
0.141273
0.241492
0.309605
0.352826
2.732897
3.77 YEARS

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