Master of Business Administration- MBA Semester 2MB0045 –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 valueof a bond.
The relation between the required rate of interest (K
) and the discount rate are displayed below.· When K
is equal to the coupon rate, the intrinsic value of the bond is equal to its face value.· When K
is greater than the coupon rate, the intrinsic value of the bond is less than its face value.· When K
is lesser than the coupon rate, the intrinsic value of the bond is greater than its facevalue.
Number of years of maturity
· When K
is greater than the coupon rate, the discount on the bond declines as maturityapproaches.· When K
is less than the coupon rate, the premium on the bond declines as the maturityincreases.
Yield to maturity
Yield to maturity (YTM) determines the market value of the bond. The bond price will fluctuate tothe changes in market interest rates. A bond’s price moves inversely proportional to its YTM.
Q2. What do you understand by operating cycle?