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BOND VALUATION
Q1
Value of bond or current market price of bond is present value of all future cash outflows of the
bond at Expected rate of return or cost of capital. It is also known as Intrinsic value or equilibrium
price.
Value of the bond
80 x 4.96
1100 x 0.403
396.8
443.3
840.71
P.V of redeemable
amount of bond @ 12%
P.V of Interest at 6%
For 16 yrs
P.V of redeemable
amount of bond @ 6% for 16 years
40 x 10.106
1100 x 0.394
404.24
433.4
837.64
P.V of Interest at 3%
For 16 yrs
P.V of redeemable
amount of bond @ 3% for 16 years
40 x 12.561
1100 x 0.623
502.44
685.3
Q2
Q3
Q4
Value of bond or current market price of bond is present value of all future cash outflows of the bond
at Expected rate of return or cost of capital. It is also known as Intrinsic value or equilibrium price.
Value of the bond
P.V of redeemable
amount of bond @ 10%
90 x 3.791
1,000 x 0.621
341.19
621
962.19
Value of bond or current market price of bond is present value of all future cash outflows of the bond
at Expected rate of return or cost of capital. It is also known as Intrinsic value or equilibrium price.
Value of the bond
P.V of Interest at 8%
P.V of redeemable
amount of bond @ 8%
70 x 7.536
1000 x 0.397
527.25
397
924.525
Value of bond or current market price of bond is present value of all future cash outflows of the bond
at Expected rate of return or cost of capital. It is also known as Intrinsic value or equilibrium price.
Value of the bond
Principal paid
Every year
Interest
1
2
3
4
5
6
7
8
125
100
225
125
87.50
212.50
125
75.00
200
125
62.50
187.50
125
50.00
175.00
125
37.50
162.50
125
25
150.00
125
12.50
137.50
Present value of future cash outflows or value of bond
total cash
outflow
Discounting
factor @ 8%
0.926
0.857
0.794
0.735
0.681
0.630
0.583
0.540
Present
value of
Cash
outflow
208.35
182.11
158.80
137.81
119.18
102.38
87.45
74.25
1070.33
Q5
Value of bond or current market price of bond is present value of all future cash outflows of the bond
at Expected rate of return or cost of capital. It is also known as Intrinsic value or equilibrium price.
Value of the bond
Q6
Year
Principal paid
Every year
1-5
6
7
8
9
10
115
115
3.517
230
115
345
0.480
230
92
322
0.425
230
69
299
0.376
230
46
276
0.333
230
23
253
0.295
Present value of Future cash outflows or Current market price of bond
total cash
outflow
Discounting
factor @ 13%
Present
value of
Cash
Outflows
404.46
165.60
136.85
112.42
91.91
74.64
985.88
Value of bond or current market price of bond is present value of all future cash outflows of the bond
at Expected rate of return or cost of capital. It is also known as Intrinsic value or equilibrium price.
Value of the bond
P.V of redeemable
amount of bond @ 16%
(9 x 2.798) + (10 x 2.798 x 0.552) + (14 x 1.605 x 0.305) + (105 x 0.226)
=
=
Q7
Interest
Value of bond or current market price of bond is present value of all future cash outflows of the bond
at Expected rate of return or cost of capital. It is also known as Intrinsic value or equilibrium price.
Value of the bond
= Rs 1,600
= Rs 2,667
b.
Current yield is the return of the bond at the current market price
Current yield
0.10
Rs 900
If current Yield is 8%
= Rs 1125
CMP =
If current yield is 12%
= Rs 750
CMP =
Q8
Value of bond or current market price of bond is present value of all future cash outflows of the bond
at Expected rate of return or cost of capital. It is also known as Intrinsic value or equilibrium price.
Value of the bond
P.V of redeemable
amount of bond @ 11%
40 x 3.695
500 x 0.593
147.8
296.7
444.52
Value of bond or current market price of bond is present value of all future cash outflows of the bond
at Expected rate of return or cost of capital. It is also known as Intrinsic value or equilibrium price.
Value of the bond
13.88
20.534 +
P.V of redeemable
amount of bond @ 10%
For 5 years
63.24
=
97.654
Equilibrium price or Intrinsic value of the bond is Rs 97.654. If this bond is available at Rs 94, Mr X
should purchase this bond.
Q10
Q11
A bond with face value of Rs 500 will be matured after 15 years at a premium of 5%.
th
Interest is paid semi-annually @ 12%p.a from 6 year
Value of bond or current market price of bond is present value of all future cash outflows of the bond
at Expected rate of return or cost of capital. It is also known as Intrinsic value or equilibrium price.
Value of the bond
=
=
=
30 x 12.462 x 0.6139
229.513
350.9455
+
+
P.V of redeemable
amount of bond @ 10%
For 15 years
525 x 0.2313
121.4325
Q12
P.V of Interest at 8%
For 5 years
P.V of redeemable
amount of bond @ 8%
11 x 3.993
140.36 x 0.681
43.923
95.585
Rs 139.508
Current market price of bond is present value of all future cash outflows at expected rate of
return.
Debenture holder has the option to convert debenture into 20 equity shares till maturity. Holder
will exercise the option of conversion when value of shares received is equal to or more than
value of debenture
Value of the Debenture =
P.V of all cash outflow
Current market price
P.V of Interest at 8%
For 5 years
P.V of redeemable
amount of bond @ 8%
12 x 3.993
100 x 0.681
47.916
68.1
116.016
Thus debenture holder will exercise the option of conversion only if Market price of share is Rs 6,
as the value of his shareholding will be more than value of debenture holdings if the price is Rs 6
or more.
Q13
Assuming current value of the bond is 1, the period required to double the value at compounding
of 9% is
x
1 . (1.09) = 2
Taking log on both sides
x log 1.09 = log 2
x X 0.374 = 3.010
x = 8.05 years
the period required to triple the value at compounding rate of 9% is
x
1 . (1.09) = 3
x log 1.09 = log 3
x (0.374) = 4.771
x=
Q14
= 12.757 years
Current value of the bond is present value of all future outflows. In case of Zero coupon bond,
outflow will be of face value, on the maturity i.e there will be no intermediate outflows in form of
interest during the life of bond.
Current market price
1,00,000 x 0.593
Rs 59,300
If currently bond is traded at Rs 74,700, the it is overpriced bond as equilibrium price of the bond
is less than actual price of the bond. In this case if investor is holding the bond, he should sell it. If
investor is not holding the bond, he should not buy it.
Expected or equilibrium price of the bond is the present value of the outflows of the bond at
expected rate of return. Higher the expected rate of return lower will be the expected or
equilibrium price.
If actual market price is higher, this implies that actual rate of return of bond is lower than
expected rate of return. In this case investor should dispose such existing bond or should not
invest in such bond
If actual market price is lower than equilibrium market price, this implies that actual rate of return
is more than expected rate of return, in this case investor should hold or purchase the bond.
Q15
Q16
a.
25,000 x 0.226
5,650
= 0.75
Bond equivalent yield = 0.75 is the return for 45 days on the investment of Rs 99.25. yield
for full year is
x 360
c.
effective annual rate of return = (value of 1 Re invested for a year with compounding
after 45 days)
(1+
Q17
a.
= 6.045 % p.a
1.0621
6.21% p.a
x 100
x 100
=
=
43.75%
If bond is sold for Rs 750 after receiving interest of Rs 150, then holding period rate of
return is
x 100
x 100
=
=
12.5%
b.
x 100
x 100
=
12.85 %
Value of return = 120 + (995 988) = Rs 127
Real return if average inflation rate is 4.49%
or
=
=
- 1
8%
Current yield
=
=
Q19
12.5%
YTM is the rate of return on bond if it is purchased at current market price and held till the date of
maturity. It is the rate at which present value of cash outflows of the bond is equal to present value
of cash inflows or current market price of the bond.
Approximate YTM
= 9.87 %
YTM of bond
Present value of cash outflows at 9%
=
=
=
=
+
+
+
+
+
+
YTM is the rate at which present value of cash outflow is equal to present value of cash inflows
i.e present value of cash outflow = Rs 925
For Present value of cash outflow of 961.20
For Present value of cash outflow of 924.28
For present value of cash outflow of 925 , rate is
=
9%
9.98%
Rate is 9%
Rate is 10%
961.20 . 9%
925
?
924.28 . 10%
x1
Q20
Current yield
x1
=
=
x 100
11.60%
YTM is the rate of return on bond if it is purchased at current market price and held till the date of
maturity. It is the rate at which present value of cash outflows of the bond is equal to present value
of cash inflows or current market price of the bond.
Approximate YTM
= 10 %
YTM of bond
Present value of cash outflows at 9%
=
=
=
115.57
+
+
+
+
+
+
YTM is the rate at which present value of cash outflow is equal to present value of cash inflows
i.e present value of cash outflow = Rs 112
For Present value of cash outflow of 115.57
For Present value of cash outflow of 107.348
Rate is 9%
Rate is 11%
9%
9.868%
115.57 . 9%
112
?
107.348 .11%
x2
Q21
x2
Value of bond or current market price of bond is present value of all future cash outflows of the
bond at Expected rate of return or cost of capital. It is also known as Intrinsic value or equilibrium
price.
Value of the bond
=
=
=
11 x 2.361
25.971
95.271
+
+
P.V of redeemable
amount of bond @ 13%
rd
For 3 year
100 x 0.693
69.3
YTM is the rate of return on bond if it is purchased at current market price and held till the date of
maturity. It is the rate at which present value of cash outflows of the bond is equal to present value
of cash inflows or current market price of the bond.
Approximate YTM
10
= 11.94 %
YTM of bond
Present value of Cash outflow at 11%
=
=
=
=
+
+
+
+
+
+
YTM is the rate at which present value of cash outflow is equal to present value of cash inflows
i.e present value of cash outflow = Rs 97.60
For Present value of cash outflow of 99.984
For Present value of cash outflow of 95.271
Rate is 11%
Rate is 13%
11 %
12.012
99.984 . 11%
97.60
?
95.271 . 13%
x2
x2
Value of bond or current market price of bond is present value of all future cash outflows of the
bond at Expected rate of return or cost of capital. It is also known as Intrinsic value or equilibrium
price.
Value of the bond
=
P.V of all cash outflow
Current market price
=
P.V of Interest at 10% +
P.V of redeemable
For 4 years
amount of bond @ 10%
th
For 4 year
=
800 x 3.170
+
10000 x 0.683
=
2536
+
6830
=
9366
11
YTM is the rate of return on bond if it is purchased at current market price and held till the date of
maturity. It is the rate at which present value of cash outflows of the bond is equal to present value
of cash inflows or current market price of the bond.
Approximate YTM
= 11.75 %
YTM of bond
Present value of Cash outflow at 11%
=
=
=
=
+
+
+
+
+
+
YTM is the rate at which present value of cash outflow is equal to present value of cash inflows
i.e present value of cash outflow = Rs 97.60
For Present value of cash outflow of 9071.6
For Present value of cash outflow of 8789.6
Rate is 11%
Rate is 12%
11 %
12.016
9071.6 . 11%
8789.6 . 12%
8785.07
?
x1
12
x1
Q23
YTM is the rate of return on bond if it is purchased at current market price and held till the date of
maturity. It is the rate at which present value of cash outflows of the bond is equal to present
value of cash inflows or current market price of the bond.
Statement of present value of cash outflows
Year
1
2
3
4
5
6
7
8
9
10
cash outflow
70
70
70
70
70
70
70
70 + 500
70
70 + 500
PV factor 5%
.952
.907
.864
.823
.784
.746
.711
.676
.644
.614
Present value
66.64
63.49
60.48
57.61
54.88
52.22
49.77
385.32
45.08
349.98
1185.47
Factor 8%
0.926
0.857
0.794
0.735
0.681
0.630
0.583
0.540
0.500
0.463
Present value
64.82
59.99
55.58
51.45
47.67
44.10
40.81
307.8
35
263.91
971.13
YTM is the rate at which present value of cash outflow is equal to present value of cash inflows
i.e present value of cash outflow = Rs 1062
For Present value of cash outflow of 1185.47
For Present value of cash outflow of 971.13
Rate is 5%
Rate is 8%
YTM
5%
6.73 %
=
=
1185.47. 5%
1062 . ?
971.13 . 8%
x3
6.73 x 2
13.46 % p.a
b.
x3
= 7.73
For 3% change in rate, change in price is 214.34, For (7.73 5) i.e 2.73% change in rate change
in price is
x 214.34 = 195.0494
New price
= 1185.47 195.0494
= 990.4206
13
Q24
YTM is the rate of return on bond if it is purchased at current market price and held till the date of
maturity. It is the rate at which present value of cash outflows of the bond is equal to present value
of cash inflows or current market price of the bond.
Approximate YTM
= 16.544 %
YTM of bond
Present value of Cash outflow at 16%
=
=
=
=
+
+
+
+
+
+
YTM is the rate at which present value of cash outflow is equal to present value of cash inflows
i.e present value of cash outflow = Rs 455
For Present value of cash outflow of 467.18
For Present value of cash outflow of 451.93
Rate is 16%
Rate is 17%
16 %
16.80 %
467.18 . 16%
455
?
451.93 . 17%
x1
x1
= 455 + 152.5
= 607.5
14
Q25
YTM is the rate of return on bond if it is purchased at current market price and held till the date of
maturity. It is the rate at which present value of cash outflows of the bond is equal to present value
of cash inflows or current market price of the bond.
Approximate YTM
= 17.30 %
YTM of bond
Present value of Cash outflow at 17%
=
P.V of interest @ 17% for 2 years
=
100 x 1.585
=
158.5
=
889.5
Present value of cash outflows at 18%
+
+
+
=
P.V of interest @ 18% for 2 years
+
P.V of redeemable value @ 18%
=
100 x 1.566
+
1000 x 0.718
=
156.6
+
718
=
874.6
YTM is the rate at which present value of cash outflow is equal to present value of cash inflows
i.e present value of cash outflow = Rs 874.75
For Present value of cash outflow of 889.5
Rate is 17%
For Present value of cash outflow of 874.6
Rate is 18%
For present value of cash outflow of 874.75 , rate is
=
17 %
17.99%
889.5 . 17%
874.75
?
874.6 . 18%
x1
x1
x1
=
10.80
= 17.99 10.80
= 7.19
15
Q26
YTM is the rate of return on bond if it is purchased at current market price and held till the date of
maturity. It is the rate at which present value of cash outflows of the bond is equal to present value
of cash inflows or current market price of the bond.
Approximate YTM
YTM of bond
Present value of Cash outflow at 7%
=
=
=
=
YTM is the rate at which present value of cash outflow is equal to present value of cash inflows
i.e present value of cash outflow = Rs 870
For Present value of cash outflow of 880.55
For Present value of cash outflow of 827.35
Rate is 7%
Rate is 8%
7%
=
=
=
7.20% semiannually
7.20 x 2
14.40 p.a
880.55 . 7%
870
?
827.35 . 8%
x1
16
x1
Q27
YTM is the rate of return on bond if it is purchased at current market price and held till the date of
maturity. It is the rate at which present value of cash outflows of the bond is equal to present value
of cash inflows or current market price of the bond.
Approximate YTM
= 5 % semi annually
i.e 5 x 2 = 10% p.a
YTM of bond
Present value of Cash outflow at 9%
=
=
=
=
+
+
+
+
+
+
YTM is the rate at which present value of cash outflow is equal to present value of cash inflows
i.e present value of cash outflow = Rs 1000
For Present value of cash outflow of 1172.6
For Present value of cash outflow of 862.25
Rate is 4%
Rate is 6%
4%
=
=
=
1172.6 . 4%
1000
?
862.25 . 6%
x1
17
x2
b.
Value of bond or current market price of bond is present value of all future cash outflows of the
bond at Expected rate of return or cost of capital. It is also known as Intrinsic value or equilibrium
price.
Value of the bond
st
917.964
MP on 1 March 08
Q28
st
st
+ 50 x
Value of bond or current market price of bond is present value of all future cash outflows of the
bond at Expected rate of return or cost of capital. It is also known as Intrinsic value or equilibrium
price.
Value of the bond
P.V of redeemable
amount of bond @ 18%
15 x 3.127
125 x 0.437
101.525
P.V of redeemable
amount of bond @ 18%
15 x 2.690
104.725
125 x 0.515
P.V of redeemable
amount of bond @ 18%
15 x 2.17
108.55
125 x 0.608
P.V of redeemable
amount of bond @ 18%
15 x 1.565
113.225
125 x .718
15 x 0.847
118.58
P.V of redeemable
amount of bond @ 18%
125 x 0.847
18
Q29
=
=
=
Capital Gain (after tax) =
=
90
10%
= 100
Approximate YTM
Rs 9
30%
9 ( 1 0.3)
6.3
9.3%
YTM of bond
Present value of Cash outflow at 9%
=
P.V of interest @ 9%
+
P.V of redeemable value @ 9%
=
6.3 x 3.88
+
103.5 x 0.649
=
24.50
+
67.17
=
91.67
Present value of cash outflows at 10%
=
P.V of interest @ 10% +
P.V of redeemable value @ 10%
=
6.3 x 3.790
+
103.5 x 0.620
=
23.877
+
64.17
=
88.047
YTM is the rate at which present value of cash outflow is equal to present value of cash inflows
i.e present value of cash outflow = Rs 90
For Present value of cash outflow of 91.67
Rate is 9%
For Present value of cash outflow of 88.047
Rate is 10%
91.67 . 9%
90
?
88.047 . 10%
9%
x1
9.461%
19
x1
Q30
Value of bond or current market price of bond is present value of all future cash outflows of the
bond at Expected rate of return or cost of capital. It is also known as Intrinsic value or equilibrium
price.
Value of the bond
P.V of Interest at 7%
For 10 years
=
=
=
80 x 7.024
561.92
1069.92
+
+
P.V of redeemable
th
amount of bond @ 7% for 10 year
1,000 x 0.508
508
Since Intrinsic value of Rs 1069.92 is more than its current Market price of rs 1040, the bond
must be held or purchased by the Investor.
YTM is the rate of return on bond if it is purchased at current market price and held till the date of
maturity. It is the rate at which present value of cash outflows of the bond is equal to present value
of cash inflows or current market price of the bond.
Approximate YTM
YTM of bond
Present value of Cash outflow at 7%
=
=
=
=
+
+
+
+
+
+
YTM is the rate at which present value of cash outflow is equal to present value of cash inflows
i.e present value of cash outflow = Rs 1000
20
Rate is 7%
Rate is 8%
7%
x1
=
=
1069.92 . 7%
1040
?
999.80 .
8%
Q31
x1
AAA + 2 % spread
364 T- bill + 3% spread + 2% spread
9% + 3% + 2%
14%
1025
15%
Value of bond or current market price of bond is present value of all future cash outflows of the
bond at Expected rate of return or cost of capital. It is also known as Intrinsic value or equilibrium
price.
Value of the bond
=
=
=
150 x 3.433
514.95
1033.95
+
+
P.V of redeemable
th
amount of bond @ 14% for 5 year
1000 x 0.519
519
Intrinsic value of the bond is more than current market price, investor should buy this bond.
21
Current yield of the bond is interest earned on Bond on its current market price
Current Yield
14.62%
YTM is the rate of return on bond if it is purchased at current market price and held till the date of
maturity. It is the rate at which present value of cash outflows of the bond is equal to present value
of cash inflows or current market price of the bond.
Approximate YTM
= 14.29%
YTM of bond
Present value of Cash outflow at 14%
=
=
=
=
+
+
+
+
+
+
YTM is the rate at which present value of cash outflow is equal to present value of cash inflows
i.e present value of cash outflow = Rs 1025.86
For Present value of cash outflow of 1033.95
For Present value of cash outflow of 999.8
22
Rate is 14%
Rate is 15%
14%
1033.95 . 14%
1025.86
?
999.80 . 15%
x1
14.237%
Q32
x1
YTM is the rate of return on bond if it is purchased at current market price and held till the date of
maturity. It is the rate at which present value of cash outflows of the bond is equal to present value of
cash inflows or current market price of the bond.
For first two years X received Interest @ 10% on face value of Rs 1,000 and for next 3 years X
received Interest @ 7% on face value of Rs 1,000 after which X received redeemable value of Rs
1,000.
Present value of cash outflows at 8%
Years
1
2
3
4
5
Amount
100
100
70
70
1070
Factor
0.925
0.857
0.793
0.735
0.680
Present value
92.5
85.7
55.51
51.45
728.22
1013.18
At 8% Present value of cash flows is more than current market price of Rs 1,000. Thus YTM is more
than 8%
Present value of cash outflows at 10%
Years
1
2
3
4
5
Amount
100
100
70
70
1070
Factor
0.909
0.826
0.751
0.683
0.620
Present value
90.9
82.6
52.57
47.81
663.4
937.28
At 10% Present value of cash flows is less than current market price of Rs 1,000. Thus YTM is less
than 10%
YTM is Between 8% and 10%
23
Rate is 8%
Rate is 10%
1013.18 . 8%
1000
?
937.28 . 10%
8%
x2
8.347%
Q33
x2
YTC is the rate at which present value of cash outflows till the date of call of the bond is equal to
present value of cash inflows or current market price of the bond.
Approximate YTM
= 10.37%
YTM of bond
Present value of Cash outflow at 10%
=
=
=
=
+
+
+
+
+
+
YTM is the rate at which present value of cash outflow is equal to present value of cash inflows
i.e present value of cash outflow = Rs 107
For Present value of cash outflow of 107.562
For Present value of cash outflow of 105.816
24
Rate is 10%
Rate is 11%
10%
10.322
107.562 . 10%
107
?
105.816 . 11%
x1
10%
Q34
x1
YTM is the rate of return on bond if it is purchased at current market price and held till the date of
maturity. It is the rate at which present value of cash outflows of the bond is equal to present value of
cash inflows or current market price of the bond.
Approximate YTM
= 9.043%
YTM of bond
Present value of Cash outflow at 8%
=
=
=
=
+
+
+
+
+
+
YTM is the rate at which present value of cash outflow is equal to present value of cash inflows
i.e present value of cash outflow = Rs 1032.40
For Present value of cash outflow of 1066.20
For Present value of cash outflow of 1000
25
Rate is 8%
Rate is 10%
8%
1066.20 .
8%
1032.40
?
1000
. 10%
x2
9.021 %
x2
YTC is the rate at which present value of cash outflows of the bond till the date of call is equal to
present value of cash inflows or current market price of the bond.
Approximate YTM
= 12.55%
YTC of bond
Present value of Cash outflow at 12%
=
=
=
=
+
+
+
+
+
+
YTC is the rate at which present value of cash outflow is equal to present value of cash inflows i.e
present value of cash outflow = Rs 1032.40
For Present value of cash outflow of 1045.7
For Present value of cash outflow of 1028.1
26
Rate is 12%
Rate is 13%
12%
1045.70 .
12%
1032.40
?
1028.1 . 13%
x1
12.756
27
x1
Q35
(2.7)
(300)
6
11.7
Present value of Net savings in cash outflows (during the life of new bond) p.a
Interest payable on new 10% bond
-
30
(300 x 0.10)
(9)
I Million p.a
1 million (0.3)
(0.3)
36
(10.8)
1.5 Million
Tax saving
1.5 Million (0.3)
(0.45)
(24.75)
Net savings in annual cash outflows
4.05
Present value of Net savings to be accrued in 6 years at 7%
4.05 x 4.767
19.306
Disc rate is cost of deb after tax 10 (1-0.3) = 7%
By replacing 12% Bond with New 10% Bond Company gains (19.306 11.7) 7.606 Millions, So
company should refund the existing Bonds.
28
Q36
(1.8)
(300)
9
14.7
Present value of Net savings in cash outflows (during the life of new bond) p.a
Interest payable on new 10% bond
-
30
(300 x 0.10)
(15)
(0.375)
37.5
(18.75)
0.3 lac
Tax saving
0.3 lac (0.5)
Net savings in annual cash outflows
Present value of Net savings to be accrued in 6 years
3.975 x 8.384
(0.15)
(18.6)
3.975
33.3264
By replacing 12.5% Bond with New 10% Bond Company gains (33.3264 14.7) 18.6264 lac, So
company should refund the existing Bonds.
29
Q37
342
(16.8)
(1.2)
(3)
(2.8)
(300)
x 25 x 0.4
4
29.2
Present value of Net savings in cash outflows (during the life of new bond) p.a
Interest payable on new 10% bond
-
36
(300 x 0.12)
(14.4)
(0.064)
0.12 lac
30
42
(16.8)
Tax saving
0.12 lac (0.4)
Tax saving on Installment of Discount of
Old 14% bond
Tax saving
(0.048)
= 0.3 lac
0.3 lac (0.4)
(0.12)
(25.032)
3.496
37.3198
By replacing 14% Bond with New 12% Bond Company gains (37.3198 29.2) 8.1198 lac, So
company should refund the existing Bonds.
Q38
Duration of Bond =
Years
1
2
3
4
5
6
Cash outflow
160
160
160
160
160
1160
YTM @ 17%
0.855
0.731
0.624
0.534
0.456
0.390
Duration
Present value
136.8
116.96
99.84
85.44
72.96
452.4
964.40
=
Time
1
2
3
4
5
6
4.24 years
3.624%
=
=
31
Q39
Duration of Bond A
Year
1
2
3
4
5
Cash outflow
12
12
12
12
112
YTM @ 15%
0.870
0.756
0.658
0.572
0.497
Duration of Bond =
Present value
10.44
9.072
7.896
6.864
55.664
89.936
=
Time
1
2
3
4
5
3.981 years
3.462%
Time
1
2
3
4
5
6
Duration of Bond B
Year
1
2
3
4
5
6
Cash outflow
110
110
110
110
110
1160
YTM @ 15%
0.870
0.756
0.658
0.572
0.497
0.432
Duration of Bond =
Present value
95.70
83.16
72.38
62.92
54.67
501.12
869.95
=
4.611 years
32
4.010%
Q40
Duration of Bond
Year
1
2
3
4
5
6
Q41a
Cash outflow
x
x
x
x
x
1,00,000 + x
YTM @ 16%
0.862
0.743
0.641
0.552
0.476
0.410
Duration of Bond
4.3202
2,46,000 + 11.391x
2.46,000 + 11.391x
2,46,000 1,77,128.20
68,871.8
15,220
41,000 + 3.684x
41,000 + 3.684 (15,220)
97,070
=
=
=
` Current yield of the bond is interest earned on Bond on its current market price
Current Yield
15.55%
YTM is the rate of return on bond if it is purchased at current market price and held till the date of
maturity. It is the rate at which present value of cash outflows of the bond is equal to present value
of cash inflows or current market price of the bond.
Approximate YTM
= 8.421% semiannually
i.e 16.842% p.a
33
YTM of bond
Present value of Cash outflow at 8%
=
=
=
=
+
+
+
+
+
+
YTM is the rate at which present value of cash outflow is equal to present value of cash inflows
i.e present value of cash outflow = Rs 90
For Present value of cash outflow of 93.27
For Present value of cash outflow of 87.196
Rate is 8%
Rate is 9%
8%
93.27 . 8%
90
?
999.80 9%
x1
8.538 semiannually
17.076% p.a
34
x1
b.
Duration of Bond
Year
1
2
3
4
5
6
7
8
9
10
Cash outflow
7
7
7
7
7
7
7
7
7
107
YTM @ 8.538%
0.921
0.849
0.782
0.721
0.664
0.612
0.564
0.519
0.478
0.441
Duration of Bond =
=
c.
Present value
6.447
5.943
5.474
5.047
4.648
4.284
3.948
3.633
3.346
47.187
89.957
=
7.365 / 2 =
=
(1+r)
=
=
0.1356
13.56%
35
Time
1
2
3
4
5
6
7
8
9
10
Q42
a.
Since both the bonds are selling at par,it means that expected rate of return or YTM is
equal to coupon rate i.e 8%
Bond with 5 years maturity
Current market price if YTM is 8%
Current market price = P.V of Interest @ 8%
=
80 x
3.9927
=
319.416
=
1000
+
+
+
+
+
+
+
+
+
+
+
+
36
b.
Duration of Bond
Year
1
2
3
4
5
6
Cash outflow
70
70
70
70
70
1070
YTM @ 7%
0.9346
0.8734
0.8163
0.7629
0.7130
0.6664
Present value
65.4206
61.1407
57.1409
53.4027
49.9090
712.9862
1000
Duration of Bond =
5.1002 years
=
c.
Time
1
2
3
4
5
6
4.7665%
Time
1
2
3
4
5
6
Cash outflow
70
70
70
70
70
1070
YTM @ 10%
0.9091
0.8264
0.7513
0.6830
0.6209
0.5645
Duration of Bond =
Present value
63.6364
57.8512
52.5920
47.8109
43.4645
603.9871
869.3422
=
5.0263 years
Due to increase in YTM duration of Bond increases from 5.1002 years to 5.0263 years, so higher
investment is recovered in shorter period of time
d.
Bond Duration is weighted average number of years over which a securitys total cash flows
occur. The weights used are the market value of the cash flows.It is the Average Time taken to
recollect back the investment in Bonds.
Duration of bond is less than Maturity because besides recovery of redemption amount on
maturity, Intermediate cash flows are also received in form of Interest I.e some part of original
investment is recovered every year, so it will take less than Maturity period to recover the original
Investment.
37
Q43
Duration of Portfolio is weighted Average of duration of each Bond in the Portfolio, weights being
amount invested in each bond (in terms of face value)
Bond
1
2
3
4
5
6
7
8
Q44
Money Duration
0.10
10.35
0.22
4.25
0.19
7.50
0.07
9.50
0.17
12.67
0.06
5.82
0.11
8.50
0.08
6.71
Duration of portfolio
Weighted Duration
1.035
0.935
1.501
0.665
2.1539
0.3492
0.935
0.5368
8.1109
Duration of Payments
Year
1
2
3
4
Amount
20,000
20,000
20,000
20,000
YTM @ 12%
0.892
0.792
0.711
0.635
Duration
Present Value
17,840
15,840
14,220
12700
60,700
time
1
2
3
4
= 2.359 years
Investment should be made in Bonds in such a way that duration of liabilities matches with
duration of Bond investments. Investment is to be made in zero coupon bond. Duration of Zero
coupon bond is equal to its maturity.
Let investment in 2 year Bond is x
Investment in 5 yr bond is (1-x)
Duration of bond portfolio is weighted average of duration of each bond in portfolio, weights being
amount invested in each bond.
x.2 + (1 x)
2x + 5 5x
5 3x
x
=
=
=
=
2.359
2.359
2.359
0.880
Thus 88% is to be invested in 2 years bond & 12% is to be invested in 5year Bond.
38
Q45
Duration of payments
Year
1
2
3
4
5
Amount
10
9
8
8
7
YTM @ 9%
0.917
0.841
0.772
0.708
0.649
Duration =
Present value
9.17
7.569
6.176
5.664
4.549
33.128
Time
1
2
3
4
5
(Rs in million)
Present Value x Time
9.17
15.138
18.528
22.656
22.745
88.237
2.663 years
=
=
=
0.50
x
1-x
=
=
=
Investment in A =
Investment in B =
Investment in C =
b.
0.0945
0.50 0.0945
0.405
50%
9.45%
40.5%
39
c.
Proportion of Each Bond to immunize the liability, if duration of each bond in portfolio is
changed
W ADA + W BDB + W CDC = 6
(0.5)(7.15) + (x)(6.03) + (0.5 x) (4.27) =
6
3.575 + 6.03x + 2.135 4.27x
=
6
1.76x =
0.29
x
=
0.164
Weight of B
Weight of C
Weight of A
Weight of B
Weight of c
Q47
=
=
=
=
=
0.164 or 16.4%
0.5 0.164
=
50%
16.4%
33.6%
=
=
=
Rs 1,000
Rs 970
Rs 18.50
=
=
50 share
50 x 18.50
i.
925
Conversion premium is an additional amount that purchaser of Bond pay over conversion
value
Market price of the Bond conversion value of the Bond
=
970
925
=
45
% premium on conversion
x 100
=
ii.
.336 or 33.6%
x 100
=
4.865%
Premium over investment value = It is the difference between current market price of
convertible Bond and the Investment value of similar Nonconvertible Bond
Investment value of the Bond =
Premium over Investment value =
Rs 870
970 - 870
=
=
=
40
x 100
11.494%
100
iii.
Conversion Parity price per share = It is the market value of the share based on current
market price of the Bond.
Since Rs 970 (current market price of convertible Bond) is paid for bond which
will be converted into 50 shares, this implies Rs 970 is paid for 50 shares.
Conversion parity price per share
iv.
Break even period.- The yield on a convertible is normally higher than the dividend yield
on the underlying instrument (equity). This circumstance is known as a yield advantage .
The breakeven time/period or payback time/period measures the time it would take for
the yield advantage on the convertible to equal the conversion premium
Yield advantage =
=
=
=
Rs 45
=
Q48
=
=
=
=
=
8%
10.25% (Discount rate)
Rs 1000
20 shares
Rs 54
c.
Conversion Premium =
x 100
=
=
5 years.
x 100
6.481%
41
Q49
x 100
x 100 = 10.417%
%age of Downside Risk = It is excess of current market price of the Bond over the straight value
of the Bond as a ratio of straight value of the Bond
=
=
x 100
12.766%
13.25
Straight value of the Bond is Intrinsic value of the bond i.e Present value of all future cash
outflows
Straight value of Bond = P.V of interest @ 7% for 20 years + P.V of redeemable value @ 7%
=
6 x 10.594
+
120 x 0.258
=
63.564
+
30.96
=
94.524
Yield to call
=
Q51
= 10%
=
Conversion value of the Bond
x 100 = 25.581%
=
430 x 10 = Rs 4300
42
Q52
Market price of Bond B = P.V of 10% Interest @ 12%for 5 years + PV of Redeemable value
=
100 x 3.605
+
1000 x 0.567
=
360.5
+
567
=
927.5
Market price of preference share C =
= 84.615
Market price of preference share D =
= 92.308
Value of Portfolio
Q53
Security
Nos
Bond A
Bond B
Preference share C
Preference Share D
10
10
100
100
Price per
share/ bond
928.18
927.5
84.615
92.308
Total value
9281.8
9275
8461.5
9230.80
36,249.1
2,00,000
70,000
2,00,000
-
___________________________
____________________________
1,30,000
45,500
2,00,000
70,000
____________________________
____________________________
84,500
1,30,000
No. of shares
EPS
PE ratio
Market price
10,000
15,000
8.45
8.67
20:1
25:1
20 x 8.45
25 x 8.67
169
216.75
Company should convert the Bonds into shares as after conversion Market price of shares
increases.
43
Q54
Market Price
If yield is 15%
Market price if it is a zero coupon Bond and yield is 14% = Present value of Redeemable value
th
@ 7% for 6 year
=
100 x 0.666
=
66.63
Q55
th
80,00,000
Amount (1 + .08 .
)=
80,00,000
Amount ( 1.01995)
80,00,000
Amount
Rs 80,00,000
8% p.a
91 days
=
Rs 78,43,521.74
st
Rs 78,43,521.40 should be invested on 31 Oct. 2003 to make payment of Rs 80 Lakh
th
on 30 jan 2004
Q56
Rs 20,00,000
8% p.a
60 days
20,00,000
Amount (1 + .08 .
)=
20,00,000
Amount ( 1.01315)
20,00,000
Amount
Rs 19,74,041
44
Q57
Assume that the company has issued Commercial paper worth Rs 10 crores
No. of Days
=
90 days
Interest rate
=
11.25%
Amount x (1 + r.
= 10 crores
Amount (1 +0 .1125 .
Amount (1.028)
= 10 crores
= 10 crores
Amount
Issued at
Redeemed at face value
Interest
97,350
1,00,000
2,650
x 12 = 10.89%
10.89 %
0.50%
0.50%
0.50%
12.39%
45