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:
C + ( P or D/years to maturity)
Yield to Maturity =
( P0 + F )/2

100 105
8+

100
=
100 + 105

8 + ( 1)
7
100 =
100
102.5
102.5

YTM = 6.82.

Q. 7. (a)

(b)

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.
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. Anns 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
managers 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
is 9 per cent. If the yield to maturity is to rise to 11 per cent what will be the
respective price change in bond A with 7 years to maturity and B with 10 years to
maturity?
Solution:
A

10

9 per cent

9 per cent

YTM

9 per cent

9 per cent

10,000

10,000

Face Value

Bond A
If YTM = 9 %

P0 = 900 (5.033) + 10,000 (0.547)

= 4527.7 + 5470
= Rs 9999.7 (or) 10,000

If YTM = 11 %

P0 = 900 (4.713) + 10,000 (0.482)

= 4241.7 + 4820 = Rs 9061.7
The P0 declined by Rs 938.3

Bond B
If YTM 9 %
P0 = 900 (6.418) + 10,000 (0.422)
= 5776.2 + 4220
= Rs 9996.2
If YTM 11 %

P0 = 900 (5.889) + 10,000 (0.352)

= 5300 + 3520

P0 = Rs 8820
The P0 declined by Rs 1176.2

Q. 10. Consider a bond selling at a par value of Rs 1,000 with 7 years to maturity and
8 per cent coupon payment. Calculate the bonds duration.
(b) If the yield to maturity increases to 9 per cent, what would be the price
change?
T

Pv (Ct )
t
t =1 Po

D=

Solution: (a)

N = 7 years, C = 8 per cent P0 = Rs 1,000

Years

Ct

PVIF (8 per cent)

Pi Total of PV

Pi /P0 Yrs

80

0.926

74.08

0.074

80

0.857

68.56

0.137

80

0.794

63.52

0.191

80

0.735

58.8

0.235

80

0.681

54.48

0.272

80

0.630

50.4

0.302

1,080

0.583

629.64

4.407
5.619

D = 5.619
(b) If YTM is 8 per cent, the price will be
= C (PVIFA k, n) + Face value (PVIF k, n)
= 80 (5.206) + 1,000 (0.583) = 999.48

If the YTM is 9 per cent

P0 = 80 (5.033) + 1,000 (0.547)

P0 = 402.64 + 547 = 949.64

If the YTM increases to 9 per cent, the change will be Rs 49.84.

Q. 11. A bond with the face value of Rs 1,000 pays a coupon rate of 9 per cent.
The maturity period is 9 years Find out the (a) approximate yield to
maturity if the require rate of return is 10% (b) current yield .
Solution:
Face Value = Rs 1000
C = Rs 90 (i.e., 9 per cent)
N = 9 years
Discount rate = 10%
Years

Cash flow

PV@ 10 per cent

PV of total cash flow

90

0.909

81.81

90

0.826

74.34

90

0.751

67.59

90

0.683

61.47

90

0.621

55.89

90

0.564

50.76

90

0.513

46.17

90

0.467

42.03

1090

0.424

462.16
942.22

The present value P0 is 942.22. There is no premium or discount.

The YTM is 10 per cent
(a) The approximate

YTM =

90
(942.22 + 1000) /2

= 0.093
YTM = 9.3 per cent
(b) Current yield =

Annual Coupon Payment

Market Price
90
=
= 9 per cent
1000

Q. 12. Determine the price of Rs 1,000 zero coupon bond with a YTM of 15 per
cent and 10 years to maturity.
Solution:
YTM = 15 per cent,
Price =
=

C = 0,

Face value = Rs 1,000

Face Value
(1 + YTM) n

1000
1,000
=
= 247.16.
10
4.046
(1 + 0.15)

Q. 13. Determine the yield to maturity if a zero coupon bond with a face value of
Rs 1,000 is sold at Rs 300. The maturity period is 10 years
Solution:
FV = Rs 1,000;
N = 10 years
C = 0;

YTM = ?
1/n

Face Value
YTM =

Bond Value

1/10

1,000
=

300

1 = 1.128

= 1.128 1 = 0.128
YTM = 12.8.

Q. 14. What is the value of Rs 1,000 bond that paying 5 per cent annual coupon
rate in semi-annual payments over 5 years until it matures if its yield to
maturity is 7 per cent?
Solution:
FV = 1,000;
C = 5 per cent;
P0 = 50 (4.10) + 1,000 (0.713) = 205 + 713
P0 = Rs 918.

Q. 15. Determine Macaulays duration of a bond that has a face value of Rs 1,000
with 10 per cent annual coupon rate and 3 years term to maturity. The
bonds yield to maturity is 12 per cent.

Solution:

FV = Rs 1,000

C = 10 per cent
N = 3 years
YTM = 12 per cent

Years

Cash flow

PVIF 12%

Pv

Pv/P0

Pv/P0
Years

100

0.893

89.3

0.0938

0.0938

100

0.797

79.7

0.0837

0.1674

1,100

0.712

783.2

0.8225

2.4675

P0 = 952.2

2.7287

Macaulays Duration = 2.7287.