cs.

es ,ssrhy del y
edheut eo it t ere
-

Sntu l t g dov
[May 2012] [4 Marks]

Q.2 Write a short note on Traditional & Walter Approach to Dividend Policy
[May 2014] [4 Marks]
r p a c n n
o s
i t t d e e u nmt i
eb
t a n s r t
r uya
h y e t ol t
a
vhec mei t t s o
p pb i
t
i i ttm r a l xa n
r thi uri a p er a
Pfwne s t o o
SECURITY VALUATION

doe ,hev a pcn

n seq
a d
u
nmo ra a i
neu ws d
afi Wiecnd
l e tns e
tla.a
e
l h y fii i o s
n v
eheui
e i
t T b e
hov sce
a s
.dt r
mtcdi ne e r ”ce p
ngas dunp
n f e e a s o
l
e a x
e
rr
e i r hms o dls
p
s
vuimt iga
e o o t s n
l ot i
s
odh ct n di me i
G t
t r l e n d y kTh
s a n e dr
,e
s oo moe h da .
Q.1 Write a short note on Zero coupon bonds
krtsutBp t omg s
neeeqs.eu t D n
atcreem b
n i u t v d dcki
Bir
THEORY
t r , n
PART 1

p n n e k , nor
yy auits d asta
badmoegr

4.1
p i o
i e e
e
t tmt h nf r m e d r
dtn i a oo e ahe a
eo n n l p h,t n h
unueo m o y y
e al i :
l s
so
s cwhu l
l eit r e a e e
i s da r r Gde t d
edi seugu
r s d h p u s e eor
o h
t
t
a d trt mcr uda . hmnm f
o
snaouc ermr n T on
e e
dodwl are u
a h r “h n o c e
nbe ean gee
s t eth a i
t i
r r e
r
oeu a

Traditional approach:
bsed i g r hot
t p a a
bss e h n tsl u h h
nhe s
i l
l
i ven l
i b o y
l
oer sgd
a a t
e s
r
s
oT ewe s b l dgh nnv
i k
r e r .
r
p. r ca nta
i nd eg )
3 a p e e
us a de ni wr dn p i
oie nrhon ah i i / M d s l
4
y t p oovw E p
cn eora eera ncio n g i
t
CHAPTER oahbohuo t e kcdl + = e n
i l
rptatto uv
e , s c p s A
o oo
n l D P d
i n u
m
te toai s e . v r
Zmdnvs
o a r i
h
sm
l t
h
f ( ,
e i
D a a
ceo unee
i r yhec a ig e m r
e E
t e z r ta she i h
t h = = =

Ans.:

Ans.:
rns mhet nar i ywn =
oI no fo tb P W D E m
t at i cot I i


 ed ynt cbene .s
y e efe s m . nretoct
hnm ba ah t n u hobr g i
-

t rt ot ft i i l t eegl e

[May 2009] [3 Marks]

Q.3 Why should the duration of a coupon carrying bond always be less than
ae a do u a a t l fi n h l
s y s nsl i gt no
e m ei enon . qm v eoier n n, i
man nd h eo
n c
s
t ee t
n ecwha ar d c
iha
t tn
n t ai d
e
n
e
fr
o e wshte
t , hert
v o o
ram ua sco
t s tik
s s ti ck
i e
e ce cr
ha . e
uro oh r
omcb
m s e bdh t h e ct o
oGf r ct pres
t
s or m r
p pnwae
n gwas
f y s
i n p fih i e css r
i
f e i a h t aone
t H
obe d d i
a ueTt v ee h h ) y t u n ov
t t n hn .
y e t sr c
i r b es. i
t n
. ledv yr sth.I i t i l h f n(l e i ctera i
e a i
r ee rf d. s s s l
a t o onot r r n
s hc t iu t
r
e
ude
qvi d t e
t
l o e
krm i ob n f
o m trpai
i
a u e s e aua
prdy
v eo ne a y n e st, r
e l t d r d tfb
t ar i fi c e u e e ng es
a sro
i ho Wcl
i
l r y n dn t
n f
i s r r e su
t
s hre o n
p t a ne l di
:
k
s ssn em Epo e
t n
a n am i
d e e
h afi
o v r m
t e te
p
s i
r dt d t n i
f tst e h t . s
ied i f st eak
n nh n a e nti f n t s s I t a nc
r n d t
eat dine
N n ega r hneo o e i i
O o r dei ra oere t av i . r n r .
) ,
I i
t i t Jmau t a e e e e e r m enom
nici
e e
T p u
t v wen e s s s n t f
i v r halu( k k
A i hd ystthl g ni e
r l o a d
i t n e
fig
m y d gn n oal g h tnmdh et
oa v a
U e m i be e en
u e i cn r n s i rint mge
e 3vbv a
L ohg h n g da
A s h t T d r so o o n a: d hte t
p a ia
V s t d ai 6n e a i i d l a fs e t ) s ehtr
a ,
y d.u
es tiv 9idh e tit e y h o m ur enore
i s bch e
Y
g j a 1ent n t r . s ( e
T
I n
t
n hge
n sd nhat s .
d edd u e c e
ca u t s i sn s
t a n l nntt v
a
R i i ci v dy i T y c e ma b v t
’ i e n
i mi e i aoi
U w a
t an
t i
t nb d. c e m n ty i r n r r
t f a erv ee r cp e
i r

i.e.
C o r t rc er entli f r
i a s t o o ps t g r o wi f h
E l
l e a a e da daoa f f t e r
e s l d tw a n l pt a td nsnt
c teb j i e e vv i e he osi t
S o n v n nvpy y r ne d a s ko s t a
t en n i ou
i
f
l u
h
gedu i
d uledc t
i y i r u
t d r fl n i
p hel
t dba ta
a brt
a b
e a i s tse oe n i u l nh e e n a m u ns r
h n f e nr
i n prel q n oit h p e msh co a nt o o g u0u g
t o i u o o t d c os i n

the time to its maturity?

o wa aa oei dp : e nw i r t n d10 i
d
n i s the t rr v s l e rt e e i
v ea f f dve w a i h
o t
a n ee
hrt
s
i c
e pa i d n l
a s ua e p i hc o
t
o en l
e n
r
fa
o ft
o
d r o
i t d lsdni o u t r a d o m m s imra o
e
s e t
i ,t
l
ono tb
n
e
ddsep
t d
t n
a l
l
e
r
h
t a s d tw
a a a a
b’
r
s fi ee to
p
rtn
ps
r d e s oen i i s. s a n ht e e he efei

Walter approach:
a a n ddds . ui i
v m s
i w fn g h a t g tr r smeth cdcn
b s o oees ois Md m i u o d n dn s t i rhyt n
h s i ch iod ae i s s l fi nn o
s
i r
o c mc a s sv s m m ee
t r n m g ei e e e T b n oo o i
l t r aba y
l i T. ’
r i
d
r
f eas r
i r
i a mte r r
i n
i uw t t da) .da i cb cat
e s e stt d e t f f r a f go n i i on
d e
v d i
h a en
r sd
r
.ds t
l t
a
d
e
a
i g e e eisal e e n
r r
a
l
l
o i n
i mo k ee e
( n
t earu
hf e
r
o n n t a a onn a h t r n
i h h hh n l
l h a f f
n f
n i r To hd
m I U rht l t ee Wtr a p T T TTu A T E re I I r lmd
n a t h
e d a s did o w e
t e
t rit rul eno
s ) ) dig dic e i enea r o ) ) ) ) ) ) l h . . l u e ca c
i
i pll t pt o

Ans.:
h ne oir viv v hriepp ( ( ( a a t aeh i
r h
( ( nd i o ( ( ( f e

i
ii
Wo Wr sw

a
b

a
b
c

d
e
f
4.2 T UwDp d Tt
I saf cds pi
 entrt .o ss.s.ea lds se
i e ts.
ue enr t
i e e h ini e r r c r
4.3

f h ao
[Nov. 2019 (Old Syllabus)] [4 Marks]
Q.4 Write a note on buy-back of shares by companies and what is the impact

l ee far r t c a e
a
vtmf Z
o m o a n naa n t
nSh h
t
pt
lua ehheasp r I , mc
ts l
i s s s h n e .er s ia
n
eewt rof a e fid m s u ef
s v
ntn s hsgw l
e n f o
o
c
e
r P h ho
t w
e i n i n ch
r i
d doh a s T ,
r o ede t

Q.1 An investor is considering the purchase of the following Bond:

preet i utnt e hg .
s e
s e
pfaporh sn
eemhr
h a eotohat fni e
s a h
h/ ttu r s t h , o a et
t
eis s
e f
o d
st
eru
de
a sre rar e r
c n
i
vhn v e osmse vs. e r ne
y e hd bE c i
i
e f i t
i h t
slfts
i ati r e e n oas
coeu r T nooi owa mh i t
eth
r r t t. ahr,itoh
e e s k H
ut
nn
y
l
l dr
nc
e
oa an.
, o
eh bce ck.f s eei a ein
t p y m i d mt acd hs r t
t somrbalk o e

NUMERICAL PROBLEMS:
eai t o u t ae
N ms rear
h r i e t u oy- b o
hc sri n
e l
u v
O ie ut ue r yns o e g i
t
I t t p a
heeebge
u y a ca ma
T evandy snhr oh b : uis e. l

3 years
A gimaet - a de r S re
e o t h e y a or

` 100
U ac hth i fm shttu l
u er hP f

11%
L r eret r o n y s r ef

PART 2
knic a T e sM
A e
vroe ret u n e b m ho
on P/E Ratio upon buy-back of shares?

V ba cr n s .a r r r yh e t
Y arfs
o e s au o f
o e p a o o nt
at, h num

i.e.
T dt b e d
l m bt i
t c hf f pn t i
I es l u - e c w r m s s g fe rnt
s s y o

Impact of Buy-Back on P/E Ratio:

R t e r u o e n n mta r oa
U h vleoi
a b w
t uod u o o
fls c h o i os eha t
C gnv
i o bt e t e t i
t w cn cs a u
E e i r d rlt edru e i o i nq
S n e l e hn ort hmd l eo r f i

Market Price of the Share

wa t u l hc po mhe
e i n oss a
u Taa hseo
r s s h
n o
f t n te ot
hf e e e

Earnings per Share

ic w l q yo e a l t c yi c nn
t , fi ,e nf v c b l e ba ki eo

Ans. Buy-Back of Shares:

se h e s ado l ta ma h sm rr
a dp
i ricty t p
to c i a pe vnnoe g y e
r e mt du
I eh r a mgneerl r

BOND VALUATION
. f pw i f b a e nd
t
n
e
r s nlw onichee
a s fi n hgs ek
hr an
eennp o a ch s f cs m e sn t a re
ac e u i ao fni op
mhoou i s
i yxcs hs
h v
i o ,M
k t
tTea
s t od ber o s w c g kr cn a
r e
d
e . m r cn a r l
fi s ca ai e
vdi ueo sisph gu l i ae be mil
l

Coupon rate
non td e syr npu
i o be
hb ys

Face Value
i e tn r
a hhi of i
t h . uea uw
rbh yt
e hstneto nE

Maturity
ro a uf S br
e
hetth
h e p sa aest
c e p n r R bi P rc e/
/hrmg e hP

P/E =
t e u n cmg
e i e v E eseE e n t
s fovi io whi n onf f a / ha t
f i sn
i
h o hHc oTS ceoh P Tc Ais Ao

i.e.

 sr
a yi
l sss s
o e e a
[Nov. 2009] [4 Marks]
(i) If he wants a yield of 13%, what is the maximum price he should be

lst s dl l
l
e e r ne l
wnv e ob e
s . vb w
si a 7 ne
i l
l s
a e 2 hwi a
tth d .
5 et t
s e
t 9 r s
e e a a fr
i n e
r c l .
s r
(ii) If the Bond is selling for ` 97.60, what would be his yield?

e i u ns,u e
t
n r c R rn t = t
i p l s ua e
r n
a i t
e ee i
hm c y h

Redemption Value − Net Proceeds

t u e a r
/ mh t
o

(12%,3)
bm b p dt t o
i l I0, b
n o e

Redemption Value + Net Proceeds

gx a t i .6
d g F
na c y y l . n I
i
s m 1 e 7 i
s V
d di 9

Maturity Period
i
r 1 s i P
N phe . w a
e ny. r
p
O s o r a%s ×
I
T
mt
os
R l
f s d3R m
o
0
A
ci = n i n1t 0
i r ota c 1

(13%,3)
U ( (
L % e o bae +
A s3 0 r t
s u s
w1 100 u F f28l : w
11
V 0 e d

2
ot 1 t I o a o

(12%,3)
Y l u V v . l
T f a × . s f n e5v e
i l
f
(i) Calculation of Maximum price

I n d 0 s r f P 3 i c9i r y n 2
R i e 0 R a o 9 e i
r .a i A 1 2
U
C
en
r
t 1 = e
Y e
0 6 h
0 . 7 t psf
R
e
t e
r
F
I 7 6
. .
E uu .
s u 1 0 .
2 t esi s a u V 0 7
S t o. R 3 l
a × 5 a hi h m t P × 9
u i

Redemption Value (RV)

cy = v h
0 9 t t et u

`
fs = + 0 x f × 0

(Rs .100 − Rs .97.60)

tu n

Interest +
ia o 0

`
fd p t
n e
1 = c a la r f 1 1 =
o o

`
ha 1

(ii) Calculation of yield

p

Maturity Period (n)

e)t e h % 0

(13%,3)
i

(Rs .100 + Rs .97.60)

o t vt

Annual Interest (I)

e s r
0 p p 4 e 2
uu u .

`
e dirr a
A + 3 +
ready to pay for?

l 9 1

`
a l y r . m ea e t . l
a = 7
a d P 1 9 t 1 2

3
vv a F 6
I 6 u o fgh u = 1 v 0
tne ,
y V 3 + m nei o t % 4
r

`
n r l . hh ) n 2 . +

2
eio g P 2 eT . d .
p o e 1 2
s t e n i
7 x b. t% n p s 2
e p b i × × 9 a i
f 4 e t × 4
r d d . a
1 1 5 yd 1g
3
s
a
( 9
1 r a
1 .
6
pml r 1 1 2 m aen p e

Rs. 11 +
eu o t i n u M 1
. u 1 2
ed o c e mla l
l a t 0 e l
he c h ese h e T h a

`
`
`

`
`
Tr w A = = = T tr L Y = T V = =

I t


Ans.:
4.4

 e 4 9 1 9 c ee
h b
4.5

Q.2 The Nominal value of 10% Bonds issued at par by M/s SK Ltd. is Rs.

[Nov. 2019 Old Syllabus [5 Marks]]

(i) 10% Government of India security currently quoted at ` 110, but interest
t 8 .3 .2 .1 il
f
.
4 0 6 2 rl
o 1 1 0 0 pi
0.681
0.650
0.621
0.593

1 1 1 1 tw
. s. . . sd
5

M s s s e
T R R R R h n
Y = = = = i gbo
1 3 h

Value of Bond
e 1 0 3 e
h 9 .
. 5 . 2
. e h
t 4 1 8 5
100. The bonds are redeemable at Rs. 110 at the end of year 5.

ht
0.735
0.708
0.683
0.659
, 7 7 6 6 t f
e
4

r + + + + ,o
o 3 9 0 6 r e e
f 9 .8 .9 .9 ou
(I) Determine the value of the bond if required yield is :

e
r .
9 8 7 6 fa l
e 3 3 3 3 ev
h r
e
T e
0.794
0.772
0.751
0.731
hh
. ] ] %T t
3
0
(II) When will the value of the bond be highest ?

N 6 ] %] % 1%
0
1. e
1
O .
7
8 9 s rd s
s
I
9
s
r s
r
r
Y Ye a
T Y Y
F 5I t
F 5a c
Given below are Present Value Factors :
A .
s F 5F 5I
U r s
I I
V V P V V lee n
`

L f
o y i P r v

0.857
0.842
0.826
0.812
P P [

Calculation
A 5 l d [ [ [ i
V e 0 0 0 0 e yg

2
Y c 0 0 e 1 1 1 1 s
l
T i % 0 1 i
y 1 1 1 1 r
e
r 1 1 h

rate is expected to go up by 1%.

I 0
R p 1 .
s .
s d + + + + et
U e R R e
r ] ] ] %] %v n
1n I
C
E
h
t i %
8
%
9
0
1 1i .
u d.

Q.3 Calculate Market Price of:

r r r r

0.926
0.917
0.909
0.901
S o q
Y
F 5I
Y
F 5I
Y
F 5I
Y
ee
F 5r l %
t e

1
I i8
l
a
r V V V V ays
u f
i P P P P dti s
q e [ [ [ [ l
e e d
u d 0 0 0 0 i l
e l n 1 1 1 1 y wie
t%. a o oy
s V b dl
o2 e n nee n

Required
m1 t e ah
e
o h % % % % th

PV Factor @ 10%
PV Factor @ 11%
a

Yield
le r i
u t t 8 9 0 1 et

PV Factor @ 8%
PV Factor @ 9%
a b l p f 1 1 c w
a

(iii) 10%
(iv) 11%
sd n a o i t

(i) 8%
r

(ii) 9%
i l o v m e pbees
eu n p e e
uo e u c d u
e
l ) v) el lgh
l v
i o a e f
i a ) i) ii hii
a w G C F R L V i
( i
( i
( i
( Twh
vd
sn ) )

Year
i I I

Ans:
h o ( I
(
Tb
 ,
s l
l
w i
(ii) A bond with 7.5% coupon interest, Face Value ` 10,000 & term to ma-

[Nov. 2010] [5 Marks]

Q.4 Based on the credit rating of the bonds, A has decided to apply the fol-
w
o
l d
turity of 2 years, presently yielding 6%. Interest payable half yearly.

f
n n
% i o d
9 e b a
e
0
. r r
9 u e p
t h
t s
= u % d d
0 % f 5 e
r 3 a a
9 f e e

Discount rate
0 0 o 7 o + r r
1 f p p

(3%,4)
.
0 ee. 3 e e s s
× 1 : uu .
s F r t % %
% l R I e a
)
0 = 9 a l V h r 2 3
1 1 0 va = t l
l + +
1 .
0 tv
n
P ,
) i
b A A
/ + 1 n × % -
T
eo A A

Market Price = P.V. of Interest + P.V. of Principal

0 % 0 s 6

12
f i 0 ( A A

6
1 9 0 e t s y
N ( o 1 r p × r 0 M0. a
O = 0
. d pm a 0
, d
-
I 0 9 l × ee e 0 T0 4
T e
i ) Y 1 Y,0 6

100
0 hd

7.5
A
1 = y e t f ) 0 3
U % c e l 5 n1
a i er × a 8 a.

`
L × 1 r bs 0 h + 8 hs
A
) t
a P 0 la 0 0 y 8 t

lowing discount rates for valuing bonds:

V e + t 0 l 0 0
, 4 l
r . rR
: a l

(3%,4)
Y c
i % d e e 1 hel 0
, 0 r a × e e
T
I r 1 l c
i k sw 0 1 o e A hv
R P y e
i r r × ds 1 .
s s y F 0 9 go
U t Y p a e 1 . R r f I 0 7 i
h b
e b t M na s a l 0 2
C
E k p t
n e /
c
i
r
1
.
9
ot R = e a
h
V
P
,
0 ,
0 sa
i
S r u k t P bs Y 1 1 )
a e r s 9 =

i.e.
o r a e ere 2 % × %
M t he (

Redemption Value (RV)

r r 3 5m

(ii) Market Price of Bond:

g e

`
`
u m e t = 5 = .

`
/ = t

Half-yearly Interest (I)

t d C t k fn r 7 + 7
( u
r o o 3 5

Credit rating
s l
e w n a e i . ) 8 nmi
e I 1

Maturity Period (n)

r i = e M c
i es a 7 8 oe
e y n n r cse . , A

`
t t d
l f o / P i
ri p = 1 8 pr A A A
n n e o p 0 pr 7 up A A

Tutorial Note:
% e .
(i) Current yield:
I e i u 1 t
e tp 6 c 3 ot

`
n r Y n o = k e m i
r + ca
o r d o
i C r ko = P × 4 eg
p u e t ( 9 a rc 5 9 hn
u c t a = 0 M a t 7 3 t i
l . e ,ll

YTM (r)
o n c u 0 mh k 3 , e e
C e e c d
l 1 w c r 1 cs
( h p l e ei a ( ne
x a r e hh

`
i i

`
= W E C Y O N Tw M = = S b


Ans.:
4.6

 S
E
C
U
R
I
T
Y
V
A
L
U
A
T
I
O
N
4.7

He is considering to invest in a AA rated ` 1,000 face value bond currently

selling at ` 1,025.86. The bond has five years to maturity and the coupon
rate on the bond is 15 per cent per annum payable annually. The next inter-
est payment is due one year from today and the bond is redeemable at par.
(Assume the 364-day T-bill rate to be 9 per cent).
You are required to calculate:
(i) The intrinsic value of the bond for A. Should he invest in the bond?
(ii) The Current Yield (CY) and
(iii) The Yield to Maturity (YTM) of the bond. [Nov. 2011] [8 Marks]
Ans.:
(i) Calculation of Intrinsic Value of the bond:
Ai
sn
pg
e
rh
t
aA
b
l
er
g
vt
i
ed
nb
i
no
t
hd
ef
qo
ur
e
s
t
i
o:
n
,
t
h
e
a
p
p
r
o
p
r
i
a
t
e
d
i
s
c
o
u
n
t
r
a
t
e
f
o
r
v
a
l
u

-
t
e
A
a
e

A
i
s
Y
T
M
=
9
%
+
3
%
+
2
%
=
1
4
%

T
h
e
o
t
h
e
r
p
a
r
a
m
e
t
e
r
s
a
r
e
:
=
1
5
%
o
f
R
s
.
1
,
0
0
0
=
R
s
.
1
5
0

Annual Interest (I)
=
R
s
.
1
,
0
0
0

Redemption Value (RV)
=
5
Y
e
a
r
s

Maturity Period (n)
A
c
c
o
r
d
i
n
g
l
y
,
I
n
t
r
i
n
s
i
c
V
a
l
u
e
o
f
f
u
t
u
r
e
i
n
f
l
o
w
s
c
a
n
b
e
c
a
l
c
u
l
a
t
e
d
a
s

= = = T(
1 1 5 c1u
5 5 1 u,
0 0 4
× × 6 e4
P 3
V 4
I
F 3
A 1 1 a

+ 1
1
0 × ,
,
0 0 3
0 . 4
× 5
P 9
V
I
F

` (14%,5)
` (14%,5)
.
3 5 m
+ 9

0 = a
,
0
0 1 e.

1 6 ,e
4

` `
.
9
+

.
4 e
0 tbd

0 (
.
3

` ` `
hR
es

r
r
n
t

r
kho
vo.
l
ud
Rh
s
.r
1
0o
2
5
.
8t
6
)e
i
sb
l
e
sd
s
t
hu
an
nd
t
hr
ep
i
n
t
r
i
n.
s
i
co
vM
a
l
u.
eA
.
0d
3
.
3
6
)
o
f
t
en

n
T
e
f
r
e
,
h

o
n
i
s

e
r
i
c
e
d
S
,
r
s
h
o
l
b
u
y
t
h
e
b

(ii) Calculation of Current Yield (CY):

=
A
n
n
u
a
l
I
n
t
e
r
e
s
t
/
P
r
i
c
e
=
1
5
0
/
1
,
0
2
5
.
8
6
=
1
4
.
6
2
%

Current yield ` `
(iii) Calculation of Yield to Maturity (YTM):
S
i
ne
cp
e
,r
t
hc
ee
cf
ot
uh
pe
ob
no
r
a
t
ea
i
s1
15
5%
%Y
aT
nM
d
bw
oi
nl
db
i
sR
r
es
d1
e,
e0
m0
a.
b
l
e
a
t
p
a
r
,
t
h
e
r
e
f
o
r
e

t
h

i
o

n
d
t

l
e
.

Yield Value (Rs.)

1 1 y
5 4 i
% % n

1
,
0 3
0 4
0 3 ,

YTM at Rs. 1025.86 can be calculated using

interpolation as per the manner given below.
1
,
0
.
6 h
B

t
e
r
p
o
l
a
t
i
o
n
t
e
Y
T
M
i
s

=
1
4
%
+

(
1
5
%
-
1
4
%
)

34.36 − 25.86
×
34.36
 S
E
C
U
R
I
T
Y
V
A
L
U
A
T
I
O
N
4.8
=
1
4
%
+

%
=
1
4
.
2
4
7
%
8.5

34.36

Q.5 A bond is held for a period of 45 days. The current discount yield is 6 per
cent per annum. It is expected that current yield will increase by 200 basis
points and current market price will come down by Rs. 2.50.
Calculate
(i) Face Value of the Bond
(ii) Bond Equivalent yield. [May 2017] [4 Marks]
Ans.:
L
e
t
t
h
e
F
a
c
e
v
a
l
u
e
o
f
b
o
n
d
b
e
R
e
.
(i) 1

P
r
i
c
e
o
f
t
h
e
b
o
n
d
i
f
t
h
e
Formula
c
u
r
r
e
n
t
y
i
e
l
d
i
s
6
%
c
u
r
r
e
n
t
y
i
e
l
d
i
s
8
%
1
-

1
-
1
-

 discount rate days to maturity   6 45   8 45 

 ×  100 × 360  100 × 360 
 100 360     
=
0
.
9
9
2
5

=
0
.
9
9
0
0
Td
he
ec
d
i
f
f
e
r
eo
nf
cR
ee
i
n0
b0
o0
n2
d5
pT
r
i
ce
er
df
uo
er
t
ob
2y
0a
0p
bp
a
s
i
sg
i
nu
c
r
et
a
s
ey
i
ne
i
n
t
e
r
e
s
tf
r
a
t
e
sa
i
su
aa
r
e
a
s
e

.
.

.
h
e
e
,

l
y
i
n

n
i
a
r
m
t
h
o
d
,
i
t
h
e
c
t
l
d
i
f
f
e
r
e
n
c
e
i
s
R
s
.
2
.
5
0
t
h
e
f
a
c
e
v
a
l
u
e
o
f
t
h
e
b
o
n
d
w
i
l
l
b
e

=
R
s
.
1
,
0
0
0
2.5
×1
0.0025
F
a
c
e
V
a
l
u
e
o
f
t
h
e
B
o
n
d
=
R
s
.
1
,
0
0
0
B
o
n
d
E
q
u
i
v
a
l
e
n
t
y
i
e
l
d

(ii)
P
r
i
c
e
o
f
t
h
e
b
o
n
d
i
f
t
h
e
c
u
r
r
e
n
t
y
i
e
l
d
i
s
6
%

c
u
r
r
e
n
t
y
i
e
l
d
i
s
8
%
W
h
e
n
F
a
c
e
V
a
l
u
e
i
s
R
s
.
1
,
0
0
0

1
0
0
0
×
0
.
9
9
2
5
=
9
9
2
.
5
0

1
,
0
0
0
×
0
.
9
9
0
0
=
9
9
0
.
0
0
B
o
n
d
E
q
u
i
v
a
l
e
n
t
Y
i
e
l
d
(
B
E
Y
)

1000 − 992.50 360 1000 − 990 360

× × 100 × × 100
B
E
Y
=

FV − V 360 992.50 45 990 45

=
6
.
0
4
5
%

=
8
.
0
8
%

× × 100
V Days to Maturity

Q.6 Bright Computers Limited is planning to issue a debenture series with a face
value of ` 1,000 each for a term of 10 years with the following coupon rates:

Years Rates
1-4 8%
5-8 9%
9-10 13%
 S
E
C
U
R
I
T
Y
V
A
L
U
A
T
I
O
N
4.9

The current market rate on similar debenture is 15% p.a. The company pro-
poses 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. [May 2016] [5 Marks]
Ans.:
Tp
ha
ey
i
s
se
un
et
pd
r
cu
i
er
o
fg
t
h0
ey
de
ea
br
es
n
t
ud
r
e
sr
ws
i
l
ln
bt
ev
t
hl
ee
so
uf
mr
o
fe
pm
r
e
s
ei
n
tn
vo
a
l
ue
eb
o
fn
i
n
t
e
r
e
s
t
m

i
n
1

a
n
p
e
e

a
u

e
d

p
t
o
f
d
e
t
u
r
e
.
fi (
(
r
s
t x
4 t
Y Y
e e
a
r
) r
s
= )
R R
s
. s
1
0 1
,
0 0
0 0
@ @
8 9
% %
= =
R R
s
. s
8 .
0 9
Interest
N
e
4
a
s
=
.
,
0

0
Interest
(
N
e
x
t
2
Y
e
a
r
s
)
=
R
s
.
1
,
0
0
0
@
1
3
%
=
R
s
.
1
3
0
Interest
1 s
(
0
t
h
Y
e
a
r
)
=
R
s
.
1
,
1
0
0
Redemption Value
= 6
1
0
Y
e
a
r

Maturity
=
1
%

YTM
Tab
hn
edt
ct
a
set
hpo
i
ne
fls
oe
wti
svn
o
fl
t
he
ef
i
n
t
e
r
e
s
tr
pe
a
r
tv
a
r
ei
ntr
o
te.
cq
ou
ne
s
t
at
n
tn
t
hT
rh
oe
ur
ge
hf
oo
u
t,
t
hw
eo
pu
e
r
i
ob
de
hr
rs

n
at
uh
ao
c
t
o
r
si
ag
g
i
el
na
nf
hm

s
i
o
.

r
e
i
t

l
d
e
t
e

o
l
v
e

e
f
l
l
o
w
n
t
a
b
u
r
o

Years Cash outflow (Rs.) PVF @ 16% PV

1 2 3 4 5 6 7 8 9 1

8 8 8 8 9 9 9 9 1
0 0 0 0 0 0 0 0 3

0
.
8
6
2

6
8
.
9
6
0
.
7
4
3

5
9
.
4
4
0
.
6
4
1

5
1
.
2
8
0
.
5
5
2

4
4
.
1
6
0
.
4
7
6

4
2
.
8
4
0
.
4
1
0

3
6
.
9
0
0
.
3
5
4

3
1
.
8
6
0
.
3
0
5

2
7
.
4
5
0 0

0
.
2
6
3

3
4
.
1
9
0 0

1
3

0
.
2
2
7

2
9
.
5
1
1

1
,
1
0
0

0
.
2
2
7

2
4
9
.
7
0

(RV)
676.29
T
h
e
c
o
m
p
a
n
y
s
h
o
u
l
d
i
s
s
u
e
t
h
e
d
e
b
e
n
t
u
r
e
s
a
t
a
p
r
i
c
e
o
f
6
7
6
.
2
9
.

Q.7 Consider two bonds, one with 5 years to maturity and the other with 20
years to maturity. Both the bonds have a face value of ` 1,000 and coupon
rate of 8% (with annual interest payments) and both are selling at par.
(i) Assume that the yields of both the bonds fall to 6%, whether the price
of bond will increase or decrease?
 S
E
C
U
R
I
T
Y
V
A
L
U
A
T
I
O
N
4.10

(ii) What percentage of this increase/decrease comes from a change in the

present value of bond’s principal amount and what percentage of this
increase/decrease comes from a change in the present value of bond’s
interest payments? [May 2009] [8 Marks]
Ans.:
T6h
h%
e,
phe
r
i
cpm
er
o
feu
bo
ofi
nby
d p
an
nd
dwo
y
i
e
di
l
a
r
ee
i
ne
vTh
e
r
s
e
l
yn
r
e
l
a
es
t
d
.i
S
i
nr
ci
ee
t
ho
et
y
i
e
l
do
f
a
l
l
sw
ot
t
(i)
t
e

ca
i

o
s
i
l
l
nl
c
r
a
s
.
hr
e
i
c
r
e
a
e
n
p
c
f
h
e
b
n
d
i
h
i
g
h
r

t
r
t
e
r
i
d
w
i
l
b
e
h
i
g
e
.
If yield falls to 6%
Price of 5 years bond
= =
8 8
0 0
× ×
P 4
V .
I
F 1
A 2

+ (

, 0
1
0
0 0
0 ×
× 0
P .
V 4
I
F 3
` (6%,5)
` (6%,5)
Increase in price

R
s
.
8
4
.
2
9
(

2
4
)
+

1
,
0

7
7
)
=
3
3
6
.
9
9
+
7
4
7
.
3
0
` `
=
1
,
0
8
4
.
2
9

`
Price of 20 years bond
= =
8 8
0 0
× ×
P 1
V 1
I
F 4
A 6

+ (
1
,
0 0
0 0
0 ×
× 0
P .
V 1
I
F 8

` (6%,20)
` (6%,20)
Increase in price

R
s
.
2
2
9
.
3
9
(

.
9
9
)
+

1
,
0

3
1
)
=
9
1
7
.
5
9
+
3
1
1
.
8
0
` `
=
1
,
2
2
9
.
3
9

`
(ii) Price increase in Bond:
(
)

a Due to change in the present value of bond’s principal amount:

Price of 5 years bond

=
P
r
i
n
c
i
p
a
l
×
[
P
V
I
F

− )6
P =
V R
I
F (s

] ).

Percentage Increase
(
66
%
,
50

86
%
,
5
=
1
,
0
0
0
×
[
0
.
7
4
7
3
-
0
.
8
]

.
6
7
0

Rs. 66.70
× 100 = 79.13%
Rs. 84.29
Price of 20 years bond
=
P
r
i
n
c
i
p
a
l
×
[
P
V
I
F

− ]
P =
V R
I
F (s

] )0

Percentage Increase
(
62
%
,
24
0
)5

87
%
,
2.
03
=
1
,
0
0
0
×
[
0
.
3
1
1
8
-
0
.
1

.
9

4
2
.
4
2
%

Rs. 97.30
× 100 =
Rs. 229.39
(
)

b Due to change in the present value of bond’s Interest amount:

Price of 5 years bond

= =
I
n
t
e
r
e
s
t 4
× 2
[
P 2
V -
I
F 3
A (.

− ]
P
V R
I
F .
A (1

] )9

Percentage Increase
69
,2
%
5
)7

8.
%
,
5
8
0
×
[
.
1
4

=
s
7
5

Rs. 17.59
× 100 = 20.87%
Rs. 84.29
Price of 20 years bond
= =
I
n
t
e
r
e
t 1
s
× .
[
P 6
V 9
I
F -
A (9

− ]
P =
V R
I
F .
A (1

] )4

Percentage Increase
61
%
,
28
0
)1

82
%
2.
,
01
8
0
×
[
1
4
9

.
8

s
3

Rs. 132.14
× 100 = 57.58%
Rs. 229.39