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What is the value of the bond, if the discount rate is 16 percent? Solution: P = 6 § t=1 120 + (1.16)t (1.16)6 1000

= Rs.120 x PVIFA(16%, 6 years) + Rs.1000 x PVIF (16%, 6 years) = Rs.120 x 3.685 + Rs.1000 x 0.410 = Rs. 852.20

2..

A Rs.100 par value bond, bearing a coupon rate of 9 percent will mature after 4 years. What is the value of the bond, if the discount rate is 13 percent?

Solution: 4 § t=1 9 + (1.13)t (1.13)4 100

P =

= Rs.9 x PVIFA(13%, 4 years) + Rs.100 x PVIF (13%, 4 years) = Rs.9 x 2.974 + Rs.100 x 0.613 = Rs. 88.07 3. The market value of a Rs.1,000 par value bond, carrying a coupon rate of 10 percent and maturing after 5 years, is Rs.850. What is the yield to maturity on this bond?

Solution: The yield to maturity is the value of r that satisfies the following equality. 5 100 1,000 Rs.850 = § + t=1 (1+r) t (1+r)5 Try r = 14%. The right hand side (RHS) of the above equation is: Rs.100 x PVIFA (14%, 5 years) + Rs.1,000 x PVIF (14%, 5 years) = Rs.100 x 3.433 + Rs.1,000 x 0.519 = Rs.862.30 Try r = 15%. The right hand side (RHS) of the above equation is: Rs.100 x PVIFA (15%, 5 years) + Rs.1,000 x PVIF (15%, 5years) = Rs.100 x 3.352 + Rs.1,000 x 0.497 = Rs.832.20

41% . we get 862.Thus the value of r at which the RHS becomes equal to Rs.30 ± 850.00 Yield to maturity = 14% + 862.30 ± 832.20 x 1% = 14. Using linear interpolation in this range.850 lies between 14% and 15%.

535 + Rs.467 = Rs. x 1% A Rs. 8 years) + Rs. The right hand side (RHS) of the above equation is: 8.502 = 47.100 x 0.5 x PVIFA (9 %.90 .09) t (1. we get 97.422 = Rs. Compute the value of the bond if the required rate of return is 18 percent. Using linear interpolation in this range.92.100 x PVIF (10%.05 Try r = 9%.335 + Rs.09)10 = 50 x PVIFA (9%.04 + 50.05 and Yield to maturity = 9 % + = 9. The market value of a Rs. Solution: 10 § t=1 50 1000 P = + (1. 742. 8 8.43 % 5.00 97.24 Thus the value of r at which the RHS becomes equal to Rs.5 x PVIFA (10%.5 percent and maturing after 8 years. 10 years) = 50 x 6.5 x 5.1000 par value bond bears a coupon rate of 10 percent and matures after 5 years.418 + Rs.20 = 97.100 x PVIF (9%.4.1000 x 0.5 100 + § t=1 (1+r) t (1+r)8 95 = Try r = 10%. 10 years) + 1000 x PVIF (9%.95. 8 years) + Rs.100 x 0. 8years) = 8. carrying a coupon rate of 8.95 lies between 9% 10%. What is the yield to maturity on this bond? Solution: The yield to maturity is the value of r that satisfies the following equality. is Rs.100 par value bond. Interest is payable semi-annually. 8 years) = Rs.8.24 ± 92.5 x 5.24 ± 95. The right hand side (RHS) of the above equation is: 8.

97 Post-tax maturity value (M) 100 [ (100-80)x 0. Capital gains taxes are paid at the time of maturity on the difference between the purchase price and par value.7. Interest is payable semi-annually.1] =Rs.34) =Rs. You are considering investing in one of the following bonds: Coupon rate Maturity Price/Rs.6 x 80 + 0.70 Your income tax rate is 34 percent and your capital gains tax is effectively 10 percent. A Rs.100 par value Bond A 11% 8 yrs Rs. 20 years) = 6 x 11.91% 5.34) =Rs.94 100 [ (100 ± 70)x 0.06 % The post-tax YTM. 20 years) + Rs. Solution: 20 § t=1 4 100 P = + (1.80 Bond B 9% 9 yrs Rs.4 x 98 10.26 + (98-80)/8 -------------------0.100 x 0. using the approximate YTM formula is calculated below Bond A : Post-tax YTM = = Bond B : Post-tax YTM = = .06)20 = 4 x PVIFA (6%.6.26 9 (1 ± 0. What is your post-tax yield to maturity from these bonds? Solution: The post-tax interest and maturity value are calculated below: Bond A Bond B * * Post-tax interest (C ) 11(1 ± 0.5. Compute the value of the bond if the required rate of return is 12 percent.1] =Rs.02 7.470 + Rs.312 = Rs.98 7.100 par value bond bears a coupon rate of 8 percent and matures after 10 years.06) t (1.6x 70 + 0.4 x 97 11.100.100 x PVIF (6%.94 + (97 ± 70)/9 ---------------------0.

1] =Rs.33) =Rs.8.40 Bond B 80 (1 ± 0.986 * Post-tax maturity value (M) 1000 [(1000-930) x 0.4 x 986 8. using the approximate YTM formula is calculated below 80. You are considering investing in one of the following bonds: Coupon rate Bond A 12% Bond B 8% Maturity Price/Rs.40 + (993-930)/7 -------------------0. Capital gains taxes are paid at the time of maturity on the difference between the purchase price and par value.1] =Rs.1000 par value 7 yrs Rs.6 + (986 ± 860)/5 ---------------------0. 860 Your income tax rate is 33 percent and your capital gains tax is effectively 10 percent. 930 5 yrs Rs.4 x 993 9.33) =Rs.6 1000 [ (1000 ± 860)x 0.53.80.66 % Bond A : Post-tax YTM = = Bond B : Post-tax YTM = = . 993 The post-tax YTM.36 % 53. What is your post-tax yield to maturity from these bonds? Solution: The post-tax interest and maturity value are calculated below: Bond A * Post-tax interest (C) 120(1 ± 0.6 x 930 + 0.6x 860 + 0.

mature in 5 years.9. A company's bonds have a par value of Rs.394 = Rs.5 x PVIFA(7%.1000.1000 x PVIF (6%. 1101. and carry a coupon rate of 14 percent payable semi-annually. what price should the bond command in the market place? Solution: P = 16 § t=1 70 + (1. If the appropriate discount rate is 12 percent.42 . 10) = Rs.07)10 = Rs.024 + Rs.5 x 7. 16) + Rs. mature in 8 years.06)16 1000 = Rs.70 x 10.70 x PVIFA(6%.06) t (1.92 10. and carry a coupon rate of 10 percent payable semi-annually.100 x PVIF (7%. what price should the bond command in the market place? Solution: P = 10 § t=1 5 + (1. 16) = Rs.508 = Rs. 85.1000 x 0.106 + Rs. A company's bonds have a par value of Rs.100.100 x 0. 10) + Rs. If the appropriate discount rate is 14 percent.07) t 100 (1.

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