Assignment #5

BM Chapter 3
3. Construct some simple examples to illustrate your answers to the following:
a. If interest rate rise, do bond prices rise or fall?
b. If the bond yield to maturity is greater than the coupon, is the price of the bond
greater or less than 100?
c. If the price of a bond exceeds 100, is the yield to maturity greater or less than the
coupon?
d. Do high-coupon bonds sell at higher or lower prices than low-coupon bonds?
e. If the interest rates change, do the prices of high-coupon bonds change
proportionately more than that of low-coupon bonds?

Ans- Please refer to sheet ‘Q3’ of attached excel for working:

a. Bond price falls if interest rates rise.
b. If YTM is greater than coupon rate, bond price is less than 100.
c. If price of the bond exceeds 100, YTM is less than coupon.

34. The duration of a bond that makes an equal payment each year in perpetuity is
(1+yield)/yield. Prove it.

Ans- Don’t understand how to prove this.

Ind_PS_Bonds_A1
2. The stated interest payment, in dollars, made on a bond each period is called the bond's:
A. Coupon
B. Face Value
C. Maturity
D. Yield to Maturity
 E. Coupon Rate
Ans- (A) Coupon
22. The yield to maturity:
A. that is expected will be realized any time a bond is sold.
B. will exceed the coupon rate when the bond is selling at a premium.
C. equals the current yield for all annual coupon bonds.
D. can only be realized if a bond is purchased on the issue date at par value.
E. equals both the current yield and the coupon rate for par value bonds.
Ans- Option (A)
32. The interest rate for a tax-exempt bond that equates to the rate paid on a taxable bond is
computed as:
A. Taxable rate / (1 – t *).
B. Tax-exempt rate × (1 – t *).
C. Taxable rate – (1 + t *).
D. Taxable rate × (1 – t *).
E. Tax-exempt rate / (1 + t *).
Ans- Option (A)
42. Moon Lite Cafe has a semiannual, 5 percent coupon bond with a current market price of
$988.52. The bond has a par value of $1,000 and a yield to maturity of 5.68%. How many
years is it until this bond matures?

A. 1.5 years
B. 1.8 years
C. 2.1 years
D. 2.2 years
E. 1.6 years
Ans- Option (B) 1.8 years
Please refer to sheet ‘Q42’ of attached excel for working:

52. A corporate bond with a face value of $1,000 matures in 4 years and has a coupon rate of
6.25 percent. The current price of the bond is $932 and interest is paid semiannually. What is
the yield to maturity?

A. 9.05%
B. 6.67%
 C. 8.58%
D. 8.28%
E. 7.92%

Ans- Option (D) 8.28%

Please refer to sheet ‘Q52’ of attached excel for working:

BM Chapter 3 – Valuing Bonds: News Source Interpretation

SEBI’s revised AT-1 valuation norms are leading to distortion according to RBI

SEBI had introduced a new set of standardised valuation rules for AT-1 perpetual bonds in April this
year which according to RBI are giving a distorted bond price when a comparison is made between
public sector and private sector banks. The SEBI guidelines give importance to the traded price where
valuation agencies need to look back 15 days for benchmark securities and 30 days for non-
benchmark securities. There has been a dip in AT-1 instruments’ prices post this change.

Source: https://economictimes.indiatimes.com/markets/bonds/revised-at-1-valuation-norms-led-to-
distortions-rbi/articleshow/84039521.cms

Matured (Past) Investment

Rs. 1 Lac Fixed Deposit at SBI

Invested in a fixed deposit at SBI 2 years ago with a principal amount of Rs. 1 Lac at ‘x%’ rate of
interest compounded annually. Calculate the rate of return –

Investment = Rs. 1,00,000

N = 2 years

Amount at maturity = Rs. 1,12,360

Please refer to sheet ‘Past_Investment’ of attached excel for working:

Present Investment

Rs. 10 Lacs education loan for MBA programme

Took a loan of Rs. 10 L for a period of 10 years at 6.7% compounded annually. It has a moratorium
period of 3 years.
 Please refer to sheet ‘Present_Borrowing’ of attached excel for working:

Credit Rating Service

Company Instrument Credit

Instrument Description
Name Category Rating

Non
1. Rs. 1500 Crore Non Convertible Debentures
Connvertible
2. Rs. 20000 Crore Proposed Long Term Bank
Long Term Debentures, CRISIL AA
Bharti Loan Facility
Long Term
Airtel Ltd. 3. Rs. 3500 Crore Non Convertible Debentures
Bamk Loan

Commercial
Short Term CRISIL A1+ Rs. 15000 Crore Commercial Paper
Paper
Non
Connvertible
1. Rs. 1000 Crore Long Term Loan
Debentures,
2. Rs. 2000 Crore Non Convertible Debentures
Long Term
3. Rs. 3000 Crore Proposed Long Term Bank
Long Term Bamk Loan, CRISIL AA-
Loan Facility
Convertible
4. Rs. 500 Crore Non Convertible Debentures
Debentures,
Tata Motors 5. Rs. 7000 Crore Fund-Based Facilities
Fund-Based
Ltd.
Facilities
Short Term
Debt, Non-
1. Rs. 1000 Crore Short Term Debt
Fund Based
Short Term CRISIL A1+ 2. Rs. 4000 Crore Non-Fund Based Limit
Limit,
3. Rs. 4000 Crore Non-Fund Based Limit
Commercial
Paper

Bonds Traded on BSE

INDIAN RAILWAY FINANCE CORPORATION LIMITED BOND

Security Code - 703IRFC36

ISIN No - INE053F08114
The IRFC Ltd. bond with a face value of Rs. 10,00,000 has a fixed coupon rate of 7.03% with a maturity date of
‘30/07/2036’. It’s last traded price (LTP) was Rs. 99.150 and it has a yield to maturity of 7.12%. From this we
can infer that the bond is being traded at a discounted rate.

Source: https://www.bseindia.com/markets/debt/tradereport.aspx