Divesh

PGP/24/387

FMI Assignment-8
Ind_PS_BONDS_A2

Concept Questions

Q7. Bond ratings are important for the buyers to get to know the worth of the bonds and help them
in making their decision. If a bond is not rated, it would be very difficult to sell that bond.

Q12. In the absence of market transparency, the investors will be unaware of the crucial market
information like the latest transaction of bonds, ask price and bid price. Without this information, he
won’t be able to make an informed decision and it’s also possible that he wont even invest in the
bond

Questions and Problems

Q7. Par Value= 10,000; Time = 17 yrs; YTM = 4.9%; Compounding= semi annually

Market Price in zero coupon bond = par value/ (1 + ytm)^t

= 10000 / (1 + .049/2) ^ (17*2)

= 4931.3

Q17.

Miller Modigliani
Time 13 (semi-annually) 13 (semi-annually)
Rate 7% 8.5%
Par Value 1000 1000
Coupon 8.5% 7%

Using PV function in excel, we get market price of bonds at different time periods

Modiglia
  Miller ni
1120.43
Year 1 8 888.5195
1106.59
Year 3 3 900.2923
1062.37
Year 8 5 939.9183
Year 1014.24
12 8 985.9048
Year
13 1000 1000

As you can see in the graph that when coupon rate is more than the YTM (millers case), the market
price tends to decrease in the further years. The bond is selling at a premium. In Modigliani case, the
bond YTM is more than coupon rate, which means that bond is sold at discount and the market price
tends to increase as we move further in the timeline.
 Divesh
PGP/24/387

1200

1000

800

600

400

200

0
Year 1 Year 3 Year 8 Year 12 Year 13

Miller Modigliani

Q37.

Time Cashflow
Oct-20 -6.5
Feb-21 1.05
Apr-21 5
Aug-21 0.78
Feb-22 0.7
Apr-22 5
Aug-22 0.43
Feb-23 0.35
Apr-23 5.08

Considering PV of cashflows = current market price, then using excel we get yield of 106.35%

Then,

Time Cashflow
Jan-14 -11
Apr-20 5
Aug-20 1.13
Feb-21 1.05
Apr-21 5
Aug-21 0.78
Feb-22 0.7
Apr-22 5
Aug-22 0.43
Feb-23 0.35
Apr-23 5.08

As done earlier, we will get yield of 27.8% on January 2014

 Divesh
PGP/24/387

Ind_PS_BONDS_A3

Q9.

Interest rate = 10%

Call premium= 150

If price > par value + premium

PV (at 7%) = 100 / 0.07 = 1428.571

Hence, it will be called

PV (at 12%) = 100/0.12 = 833.333

Hence, it will not be called

Weighted average of the price = (1150 * 0.4) + (833.33 * 0.6)

= 960

Market price = (960+100)/1.1

= 963.64