Mb0045 Smu Solved Assignment
Master of Business Administration- MBA Semester 2
MB0045 –Financial Management - 4 Credits
(Book ID: B1134)
Assignment Set- 1 (60 Marks)
Note: Each Question carries 10 marks. Answer all the questions.
Q1. Show the relationship between required rate of return and coupon rate on the value of a bond.
Answer : . It is important for prospective bond buyers to know how to determine the price of a bond because it will indicate the yield received should the bond be purchased. In this section, we will run through some bond price calculations for various types of bond instruments.
Bonds can be priced at a premium, discount, or at par. If the bond’s price is higher than its par value, it will sell at a premium because its interest rate is higher than current prevailing rates. If the bond’s price is lower than its par value, the bond will sell at a discount because its interest rate is lower than current prevailing interest rates. When you calculate the price of a bond, you are calculating the maximum price you would want to pay for the bond, given the bond’s coupon rate in comparison to the average rate most investors are currently receiving in the bond market. Required yield or required rate of return is the interest rate that a security needs to offer in order to encourage investors to purchase it. Usually the required yield on a bond is equal to or greater than the current prevailing interest rates.
Fundamentally, however, the price of a bond is the sum of the present values of all expected coupon payments plus the present value of the par value at maturity. Calculating bond price is simple: all we are doing is discounting the known future cash flows. Remember that to calculate present value (PV) – which is based on the assumption that each payment is re-invested at some interest rate once it is received–we have to know the interest rate that would earn us a known future value. For bond pricing, this interest rate is the required yield. (If the
MB0045 –Financial Management - 4 Credits
(Book ID: B1134)
Assignment Set- 1 (60 Marks)
Note: Each Question carries 10 marks. Answer all the questions.
Q1. Show the relationship between required rate of return and coupon rate on the value of a bond.
Answer : . It is important for prospective bond buyers to know how to determine the price of a bond because it will indicate the yield received should the bond be purchased. In this section, we will run through some bond price calculations for various types of bond instruments.
Bonds can be priced at a premium, discount, or at par. If the bond’s price is higher than its par value, it will sell at a premium because its interest rate is higher than current prevailing rates. If the bond’s price is lower than its par value, the bond will sell at a discount because its interest rate is lower than current prevailing interest rates. When you calculate the price of a bond, you are calculating the maximum price you would want to pay for the bond, given the bond’s coupon rate in comparison to the average rate most investors are currently receiving in the bond market. Required yield or required rate of return is the interest rate that a security needs to offer in order to encourage investors to purchase it. Usually the required yield on a bond is equal to or greater than the current prevailing interest rates.
Fundamentally, however, the price of a bond is the sum of the present values of all expected coupon payments plus the present value of the par value at maturity. Calculating bond price is simple: all we are doing is discounting the known future cash flows. Remember that to calculate present value (PV) – which is based on the assumption that each payment is re-invested at some interest rate once it is received–we have to know the interest rate that would earn us a known future value. For bond pricing, this interest rate is the required yield. (If the