Take home Assignment Worksheet no.

1
BOND Valuation
1. A 6 year bond of Rs.1000 has an annual rate of interest of 14 %. The interest is
paid half yearly. If the required rate of return is 16% what is the value of the
bond?
2. Bonds of a Cement Company , which carries AA rating, with five year to maturity
and 16% coupon rate payable half yearly, is being traded Rs.1040. The discount
rate to be applied is 364 T Bills at 4% plus (T bill rate is 10%).
You as a manager of Trust Fund, a 80%Debt Fund, want to ascertain the intrinsic
value of the bond and take a decision accordingly.
a)
What is the intrinsic value of the bond
b)

As the current market price is Rs.1040 what decision should you take?

c)

Compute the YTM

3. Amar is willing to purchase a five year bond of Rs.1000 par value bond having a
coupon rate 9%. Amars required rate of return is 10%. How much should
Amar pay to buy the bond if it matures at par.
4. A $5,000 bond pays the holder an interest rate of 10% payable semi-annually. The
bond will be redeemed at par in 10 years. An investor wants to purchase the bond
on the bond market to yield a return of 12% payable semi-annually. What would
be the purchase price of the bond?
5. What will be the price of a 9% coupon bond with 20 years to maturity and a par
value of Rs1000, if the required yield in 12%. What will be the price of the same
bond if the required yield is 7%?
6. Suppose in 2006 you are considering investing in Government of India Securities
(G-Sec.) . You find that there are two five year bonds each with coupon rate of 5%
and 10% with YTM of 8.78% and 8.62%. Calculate their value or intrinsic price.
Explain why they are different.
Year
2007
2008
2009
2010
2011

Interest rate
0.05
0.06
0.07
0.08
0.09

CF
Rs50
50
50
50
1050
Totals

Present Value Calculations

PV of CF
CF
PV of CF
47.62
100
44.5
40.81
36.75
682.43
852.11

7. What will be the value of a 10 year corporate bond of Rs.5000 face value with
10% coupon rate paid semi-annually if the required yield is 12%? If the coupon
payments are on 1st April and 1st Oct and the bond is sold on Sept 3rd what will be
the accrued interest?
8. Suppose a bond with Rs1000 face value was issued some years back at 7%
coupon rate annually. If only three years are left to maturity and current required
return is 8% what will be the market price of the bond? At what price will the
bond sell after two years? If an investor buys the bond at Rs.982.17 and sells it
after one year what will be the investors rate of return?
9. German government issues a bond in 2004 with a face value of 100,with coupon
rate of 5.375%. The bond will mature in 2010. What is the price of the bond if the
YTM is 5% ?
10. Ely Jones owns a $1000 face value bond with three years to maturity. The bond
makes an annual interest payment of $75, the first to be made one year from
today. The bond is selling is currently priced at $975.48. Given the required
discount rate to be 10% should Jones sell or hold the bond?
11. a) Calculate the YTM for a 9% 5 year bond issue in the market. The issue price is
Rs.90 and the redemption price is Rs.105.
b) In the same bond if an investor has a Marginal Income Tax rate of 30% and
the Capital gains tax of 10% and bond is issued at a discount of 10%, what is
the post tax yield?
Short Cut method to compute Yield To Maturity
YTM = R2 + [V2 VM ] * [ R1 - R 2 ]
[V2 V1]
Solved Problem
1. A 5 year bond with 8% coupon rate and maturity value of Rs. 1,000 is currently selling at
Rs 925. What is the Yield to Maturity?
YTM = Coupon return + Pro-rated Discount
1( Redemption price + Purchase Price)/2
Particulars
Coupon Return
Pro-rated Discount

Computations
=
Rs.1000*8% = Rs. 80
= Net Capital Appreciation / No. of
= (Redemption Price - Issue Price)/5
= (1000 925)/5 = 15
Redemption Price
Rs.1000
Purchase Price
Rs. 925
YTM = (80 + 15)/ (1000 + 925)/2
= 95/ 962.5 = 9.87 %

years to Maturity