1

Face value = 1000

Coupon amount = 25
No of coupons = 10
YTM = 0.0315
Price at the start = ₹ 944.98
YTM changed to = 0.05
New price = ₹ 806.96
% price change = -14.61%
Sensitivity ( price change /YTM change)= -7.895

2
P0 ( price now)= ₹ 806.96
P1= ₹ 822.30
P2= ₹ 838.42
CGY at 1= 1.90%
CuY at 1= 3.10%
CGY at 2= 1.96%
CY at 2= 3.04%

3
Since the bnds are identical their YTMs must be equal
YTM for the first bond = 11.00%
So YTM for second bond= 11.00%
So price of second bond = ₹ 1,064.93

4
r= 0.06
Bond A
CFs 1to 12 ( s/a)
PVs 0

Total price= PA= 18033.86

Bond B
CFs 3888.89

Final price to be paid = 1090

Bond issued at par => the YTM =14%
CFs 0
 -1000
realized rate of return = 7.49%
14.98%
6

P5( at the end of 5 years )= ₹ 1,041.52

P0 = pv of expected CFs till year 5 $987.87

7
EAR= 8.16%
s/a rate = 4.00%
Price $1,067.95
8
YTM of the bond NOW= 6.54%
After 2 years ( 8 yrs remaining), YTM= 5.54%
The Price then = ₹ 1,155.80
YR--> 0
CF -1105
HPY 9.43%

Say FV of each =1000

at t=0,P-prem= ₹ 1,082.00
at t=0,P-disc= ₹ 918.00

at t=1,P-prem= ₹ 1,067.74
at t=1,P-disc= ₹ 932.26

CY --> prem bond 8.32%

CGY--> prem bond -1.32%

CY --> disc bond 5.45%

CGY--> disc bond 1.55%

10

Net proceeds after underwriter fees = 32.2

Amount needed ( net) in hand= 25000000
No of shares to be issued = 776398

11
 Funds needed = Rs. 5 crore
Existing number of shares = 5 lakhs
Current market price = Rs. 170
Subscription Price = Rs. 125
a. Number of new shares to be issued = Rs. 5 crore / 125 = 400,000
b.. Number of rights existing = 5 lakhs . So number of rights needed to purchase one
new share = 500,000/400,000 = 1.25
c. Ex rights price of share = (500,000 *170 + 400,000*125)/900,000 = Rs. 150
d. Value of a right = 170- 150 = 20 or 150 = 1.25 R + 125 i.e R= 20
e. Shareholder value if lets say has 5 shares
i. Before value = 5 *170 = 850
ii. Exercises rights = 150*9 – 125*4 = 850
c. Sells his rights = 20*5 +150*5 = 850
iii. Does not exercise rights = 5*150 = 750.

12

Solution : Let us consider a shareholder who has 4 shares.

He will have 4 rights and hence one new rights share.
If the shares are to be correctly priced, then his value should remain unaltered before
and after the ex rights day.
Value of his holding before ex rights day = 4*$80
Value after ex rights = (4+1)*Px - $40
So, (4+1)*Px – 40 = 4*$80
Therefore Px = $72. That is the shares are correctly priced.
If that is so, then the value of the rights in the market should be = $80 - $72 = $8 > $6
Therefore the rights are under priced.
Arbitrage Possibility: Buy 4 rights from the market @ 4 *$6 = $24 + pay $40 to get get a
new rights share. Investment = $64, Value of new share obtained = $72 Riskless
arbitrage profit = $8.

13

Net proceeds to the company after spread/floatation costs =36*(1-0.06) = $33.84

M =$ 4.1 million
Pm = $40, N= 490,000
No of rights shares to be issued = [4.1 x10^6/(0.94)] /( 36) = 121,1596
490,000*40  [(4.1*10 ) / 0.94]
Ex rights price =  39.207
490,000  121159
Value of one right = 40-39.207 = 0.793
You should get = 5000*0.793 =3,964.88
14

0 D0 2.00
1 D1 2.40
2 D2 2.88
3 D3 3.46
4 D4 4.15
5 D5 4.98
6 D6 5.18
7 D7 5.38

P0 66.64

15
r
0
1 16%
2 16%
3 16%
4 14%
5 14%
6 14%
7 11%
8 11%
….

16 Div
0-9 0
10 10

17 Div
0 7
1 11
2 15
3 19
4 23
5 0
6 0
…..
18 Div
0 4.5
1 5.4
 2 6.48
3 7.2576
4 8.128512

19 Div
0 2.750
1 3.300
2 3.795
3 4.175
4 4.383
5 4.602
6 4.833
7
8

20 Div
0 1.5
1
2
3
4
5

21
0 D0=
1 D1
2 D2=
3 D3=

a DY at 0=
exp(CGY ) at 0

0
b DY at 0= 1
exp(CGY ) at 0 2
3
4
5
 6
DY at 0=
exp(CGY ) at 0
--> note that this is somewhat close to the remaining maturity period = 10

CGY + CY = 5.00%

CGY + CY = 5.00%

13 to 28 29 to 40 + at 40
2000 2500 40000
10044.6407 7989.219

=1 to 12 6
 70 1090
-->sa basis
APR

1 2
80 ₹ 1,235.80

--> TY = 7.00%

--> TY = 7.00%
 121158.39
 39.207
4361702.1
23961702
39.207025
 PV r 10% g 4%

2.18
2.38
2.60
2.83
3.09 P5 86.26

Div Price
3.5 P0 50.75
3.675
3.85875
4.0516875 P3 65.74
4.25427188
4.46698547
4.69033474 P6 82.08
4.92485148
5.17109405
5.42964876

Price r 13% g 6%
P9 142.86
P0 47.55

Price r 11% g ?
P0 51.13

P4 0

r Price 18% g 12%

P0 96.10169492
P1 108
 P2 120.96

DY 5.6%
CGY 12.4%
TY 18.0%

g Price
P0 46.76
20%
15%
10% P3 54.79
5%
5%
5%
…

c=intergra
a =status ting into
g quo b=timber retail
37.5 30 37.5
9%
9%

1.6 P0= 54.11

1.92 P1 57.6
2.304 P2 61.056
2.44224

3.55%
6.45% --> TY= 10.00%

D0= 1.6 P0= 75.98

D1 1.92 P1 81.65
D2= 2.304 P2 87.51
D3= 2.7648 P3
D4= 3.31776
D5= 3.981312 P5= 105.50
D6= 4.2201907
2.53%
7.47% --> TY= 10.00%
realtion will hold if YTM does not change
T 10
FV 1000
C% 3.50%
YTM P CY CGY TY
0 4.00% ₹959.45 3.65% 0.35% 4.00%
1 4.00% ₹962.82 3.64% 0.36% 4.00%
2 4.00% ₹966.34 3.62% 0.38% 4.00%
3 4.00% ₹969.99 3.61% 0.39% 4.00%
4 4.00% ₹973.79 3.59% 0.41% 4.00%
5 4.00% ₹977.74 3.58% 0.42% 4.00%
6 4.00% ₹981.85

T 10
FV 1000
C% 4.50%
YTM P CY CGY TY
0 4.00% ₹1,040.55 4.32% -0.32% 4.00%
1 4.00% ₹1,037.18 4.34% -0.34% 4.00%
2 4.00% ₹1,033.66 4.35% -0.35% 4.00%
3 4.00% ₹1,030.01 4.37% -0.37% 4.00%
4 4.00% ₹1,026.21 4.39% -0.39% 4.00%
5 4.00% ₹1,022.26 4.40% -0.40% 4.00%
6 4.00% ₹1,018.15
realtion will not hold if YTM changes
T 10
FV 1000
C% 3.50%
YTM P CY CGY
0 4.00% ₹959.45 3.65% 0.35%
1 4.00% ₹962.82 3.64% -6.21%
2 5.00% ₹903.05 3.88% 1.12%
3 5.00% ₹913.20 3.83% 6.63%
4 4.00% ₹973.79 3.59% 0.41%
5 4.00% ₹977.74 3.58% 2.28%
6 3.50% ₹1,000.00

T 10
FV 1000
C% 4.50%
YTM P CY CGY
0 4.00% ₹1,040.55 4.32% -0.32%
1 4.00% ₹1,037.18 4.34% -6.70%
2 5.00% ₹967.68 4.65% 0.35%
3 5.00% ₹971.07 4.63% 5.68%
4 4.00% ₹1,026.21 4.39% -0.39%
5 4.00% ₹1,022.26 4.40% 1.42%
6 3.50% ₹1,036.73
 TY
4.00% YTM unchanged
-2.57% result YTM changed from 4% to 5%
5.00% YTM unchanged
10.47% result YTM changed from 5% to 4%
4.00% YTM unchanged
5.86% result YTM changed from 4% to 3.5%

TY
4.00% YTM unchanged
-2.36% result YTM changed from 4% to 5%
5.00% YTM unchanged
10.31% result YTM changed from 5% to 4%
4.00% YTM unchanged
5.82% result YTM changed from 4% to 3.5%