Divesh

PGP/24/387

FMI Assignment 7

Q7. A - Par value bond

Q17. E- At issuance, the bond’s yield to maturity is 5.5 percent.

Coupon rate – 5.5%

Par Value- $1,000

Price - $1,000

Time- 10 years

YTM = (C + (FV-PV)/t) / (FV +PV)/2

= (55 + (1000-1000)/10) / (1000 + 1000) /2

= 55 / 1000

= 5.5%

Q27. D- Baa and BB

Q37. D- 8.93%

Par Value - $1,000

Final Value= $923.60

Time- 15 yrs

No. of periods – 30

Coupon rate – 8% annually (4% semi-annually)

Year Cash flows ($)

0 -923.6
1 40
2 40
3 40
4 40
5 40
6 40
7 40
8 40
9 40
10 40
11 40
12 40
13 40
14 40
15 40
16 40
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PGP/24/387

Year Cash flows ($)

17 40
18 40
19 40
20 40
21 40
22 40
23 40
24 40
25 40
26 40
27 40
28 40
29 40
30 1040

Using =IRR() formula, we get 4.47% as half yearly interest rate.

Hence, YTM = 4.47*2 = 8.93%

Q47. D- Mason’s bond will increase in value by $41.

Mason

Coupon Rate = 8%; YTM= 8%; Par Value= 1,000

Case 1 : If coupon rate = YTM, then bond price is equal to 1,000

Case 2; When YTM= 7%,

Cashflow
Year s PV
1 80 74.77
2 80 69.88
3 80 65.30
4 80 61.03
5 1080 770.03
    1041.00
Change = 1041 – 1000 = 41

Dixon

Coupon Rate = 8%; YTM= 8%; Par Value= 1,000

Case 1 : If coupon rate = YTM, then bond price is equal to 1,000

Case 2; When YTM= 7%,

Cashflow
Year s PV
1 80 74.77
2 80 69.88
3 80 65.30
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Cashflow
Year s PV
4 80 61.03
5 80 57.04
6 80 53.31
7 80 49.82
8 80 46.56
9 80 43.51
10 1080 549.02
    1070.24
Change = 1070.24 – 1000 = 70.24

Out of the given options, only D is true.

Q57. A- 7.89%

Coupon rate = 8.2%; Par Value= 1,000; Time = 11.5 yrs ; YTM= 7.67%

Using excel, we get the bond price as 1039.57

Coupon payment at 8.2% is 82

Current yield = coupon payment/market price * 100

= 82 * 100 / 1039.57

= 7.89%

Q67.

As the interest rate increases, the bond price will decrease. For eg- If a person having bond of par
value 1,000 giving interest rate of 15% and then if interest rate increases to 20%, the bond price of
bond will be reduced as the bond is paying the same coupon rate and one will be willing to pay less
for the returns. Also, the risk in the bond reduces as interest increases.

Common Question

1. Company – Dabur India Ltd

S.No Instrument Rating Status

1 Bank Guarantee CRISIL A1+ Reaffirmed
2 Long term Bank Facility CRISIL AAA/Stable Reaffirmed
3 Non-Convertible Debentures CRISIL AAA/Stable Reaffirmed
4 Commercial Paper CRISIL A1+ Reaffirmed
Healthy surplus of INR 3300 crore, minimum dependence on debt and adequate assets against
expenditure contributing to good ratings

Source-
https://www.crisil.com/mnt/winshare/Ratings/RatingList/RatingDocs/Dabur_India_Limited_May_1
9_2020_RR.html Accessed on 28th September, 2020

2. Company – Power Finance Corporation ltd.

S.No Instrument Rating Status

1 Institutional Bonds CRISIL AAA/Stable Reaffirmed
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2 Term Loans CRISIL AAA/Stable Reaffirmed

3 Long Term Borrowing CRISIL AAA/Stable Reaffirmed
4 Short Term borrowing CRISIL A1+ Reaffirmed
Government major ownership, financing Indian power segment and sufficient capitalisation
contributing to good ratings

Source-
https://www.crisil.com/mnt/winshare/Ratings/RatingList/RatingDocs/Power_Finance_Corporation_
Limited_March_29_2020_RR.html Accessed on 28 th September, 2020

Power Finance Corporation Ltd. Institutional Bonds

Face Value – 1,000,000

Maturity Date – 15/10/2022

ISIN No- INE134E08KG2

Yield – 5.05%

Coupon Rate – 7.35% (fixed)

Last traded on 28/09/20 at LTP of 104.42

The bond is rated as AAA/stable (by CRISIL) which means its an investment grade bond.

Through the above cases, it is evident that the company raises its finances through the issue of debt
instruments like debentures, bonds, long-term and short-term borrowings etc. whose rating is
dependent on the company’s financial position such as adequate capitalisation, enough assets to
repay its debt obligations, its reputation and presence in the market, ownership etc. The company
with the strong credentials ha a high chance to get AAA/stable rating. These ratings are given by
agencies like CRISIL, IKRA, Moody’s, Fitch, Standard and Poor’s etc. In the above examples, CRISIL
ratings have been used.