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+ 
=  5  × 100
 100 + 105 
 
 2 
8 + ( −1) 7
= × 100 = × 100
102.5 102.5
YTM = 6.82.
Q. 7. (a) 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.
(b) 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)

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Q. 8. Ann’s 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
manager’s 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 B

N 7 10

C 9 per cent 9 per cent

YTM 9 per cent 9 per cent

Face Value 10,000 10,000

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

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 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 )
Solution: (a) D=∑ ×t
t =1 Po

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

Years Ct PVIF (8 per cent) Pi Total of PV Pi /P0 × Yrs

1 80 0.926 74.08 0.074

2 80 0.857 68.56 0.137

3 80 0.794 63.52 0.191

4 80 0.735 58.8 0.235

5 80 0.681 54.48 0.272

6 80 0.630 50.4 0.302

7 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

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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
1 90 0.909 81.81
2 90 0.826 74.34
3 90 0.751 67.59
4 90 0.683 61.47
5 90 0.621 55.89
6 90 0.564 50.76
7 90 0.513 46.17
8 90 0.467 42.03
9 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
90
(a) The approximate YTM =
(942.22 + 1000) /2
= 0.093
YTM = 9.3 per cent
Annual Coupon Payment
(b) Current yield =
Market Price
90
= = 9 per cent
1000

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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, C = 0, Face value = Rs 1,000
Face Value
Price =
(1 + YTM) n
1,000 1000
= 10
= = 247.16.
(1 + 0.15) 4.046
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 =   −1
 Bond Value 
1/10
 1,000 
=   − 1 = 1.128
 300 
= 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 Macaulay’s 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
bond’s yield to maturity is 12 per cent.

Solution: FV = Rs 1,000
C = 10 per cent
N = 3 years
YTM = 12 per cent

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 Years Cash flow PVIF 12% Pv Pv/P0 Pv/P0 ×
Years
1 100 0.893 89.3 0.0938 0.0938
2 100 0.797 79.7 0.0837 0.1674
3 1,100 0.712 783.2 0.8225 2.4675

P0 = 952.2 2.7287

Macaulay’s Duration = 2.7287.