Bond Analysis
Chapter 10: Bond Return and Valuation
Q. 6. Find out the yield to maturity on a 8 per cent 5 year bond selling at Rs 105?
Solution: Yield to Maturity = [pic] = [pic] = [pic] × 100 = [pic] × 100 YTM = 6.82.
Q. 7. (a) Determine the present value of the bond with a face value of Rs 1,000, coupon rate of Rs 90, a maturity period of 10 years for the expected yield to maturity of 10 per cent.
(b) In N is equal to 7 years in the above example, determine the present value of the bond. Discuss the effect of the maturity period on the value of the bond.
Solution:
Face Value = Rs 1,000 Coupon Rate = Rs 90 Maturity Period = 10 years YTM = 10 % Present value = C(PVI FA k,n) + F (PVIF k,n) = 90 (6.145) + 1000 (0.386) = 553.05 + 386 = Rs 939.05 If N = 7 years Present Value = 90 (4.868) + 1,000 (0.513) = 438.12 + 513 P0 = Rs 951.12
With the increase in maturity period, the discount rate has increased, the discount is more (1000 – 939.05 = Rs 60.95) in 10 year bond than 7 year bond (1000 – 951.12 = Rs 49.88)
Q. 8. Ann’s bond portfolio manager advises her to buy a 7 years, Rs 5,000 face value bond that gives 8 per cent annual coupon payments. The appropriate discount rate is 9 per cent. The bond is currently selling at Rs 4,700. Should Ann adhere to the manager’s advice?
Solution: N = 7 years, C = 8 %, Discount rate = 9 % Market price = Rs 4700, Face value = Rs 5,000. P0 = C(PVIFA k,n) + Face value (PVIF k,n) = 400 (5.033) + 5,000 (0.547) = 2,013.2 + 2,735 = Rs 4,748.2 Rs 4,700 < 4,748 Ann can buy the bond.
Q. 9. Bonds A and B have similar characters except the maturity period. Both the bonds carry 9 per cent coupon rate with the face value of Rs 10,000. The yield to maturity
Q. 6. Find out the yield to maturity on a 8 per cent 5 year bond selling at Rs 105?
Solution: Yield to Maturity = [pic] = [pic] = [pic] × 100 = [pic] × 100 YTM = 6.82.
Q. 7. (a) Determine the present value of the bond with a face value of Rs 1,000, coupon rate of Rs 90, a maturity period of 10 years for the expected yield to maturity of 10 per cent.
(b) In N is equal to 7 years in the above example, determine the present value of the bond. Discuss the effect of the maturity period on the value of the bond.
Solution:
Face Value = Rs 1,000 Coupon Rate = Rs 90 Maturity Period = 10 years YTM = 10 % Present value = C(PVI FA k,n) + F (PVIF k,n) = 90 (6.145) + 1000 (0.386) = 553.05 + 386 = Rs 939.05 If N = 7 years Present Value = 90 (4.868) + 1,000 (0.513) = 438.12 + 513 P0 = Rs 951.12
With the increase in maturity period, the discount rate has increased, the discount is more (1000 – 939.05 = Rs 60.95) in 10 year bond than 7 year bond (1000 – 951.12 = Rs 49.88)
Q. 8. Ann’s bond portfolio manager advises her to buy a 7 years, Rs 5,000 face value bond that gives 8 per cent annual coupon payments. The appropriate discount rate is 9 per cent. The bond is currently selling at Rs 4,700. Should Ann adhere to the manager’s advice?
Solution: N = 7 years, C = 8 %, Discount rate = 9 % Market price = Rs 4700, Face value = Rs 5,000. P0 = C(PVIFA k,n) + Face value (PVIF k,n) = 400 (5.033) + 5,000 (0.547) = 2,013.2 + 2,735 = Rs 4,748.2 Rs 4,700 < 4,748 Ann can buy the bond.
Q. 9. Bonds A and B have similar characters except the maturity period. Both the bonds carry 9 per cent coupon rate with the face value of Rs 10,000. The yield to maturity