FIS assignment:

Q. For three bonds with different payment schedules viz. Bullet Bond, fully amortized bond and a
partially amortized bond, the following key information are available.

1. Principal : INR 1000 Cr

2. Maturity Period: 5 (five) years
3. Coupon Rate : 6%
4. Interest payments made annually
5. The bonds issued and redeemed at par
6. The balloon payment is INR 20 Cr at maturity

Assumption: The market interest rate used to discount the bonds’ expected cash flows until maturity is
constant at 6%.

Prepare tabular statements of payment schedule for each of the three bonds separately as per the
format furnished hereunder for the 5 (five) years till maturity payment.

Solution:
BULLET BOND- A bond whose principal is paid all at once at maturity.
Thus we will only pay the coupon amount during the 5 year period and the final amount of 1000cr +
6%coupon during the 5th year.
Now, 6% of 1000cr = 60crs

(Values in crores)

Year Investor Cash Interest Principal Outstanding Principal at

Flows Payment Repayment the end of the Year
1 60 60 0 1000
2 60 60 0 1000
3 60 60 0 1000
4 60 60 0 1000
5 1000+60 = 1060 60 1000 NIL

FULLY AMORTIZED BONDS- A bond where the principal repayment is done little by little in
equal instalments till maturity thereby repaying the full amount till maturity.
Here coupon rate is 6% = 60 crs with interest deduction 6% as principal is being paid simultaneously.
Thus, discounted rate = 60
PMT of 1st year = 117.4 (using the formula PV of annuity)
Therefore, total payment per year= 177.4+ 60= 237.40 (fixed for every year)
Thus we can calculate for further years.
 Year Investor Cash Interest Principal Outstanding Principal at
Flows Payment Repayment the end of the Year
1 237.40 60 177.4 822.6
2 237.40 49.35 188.05 634.56
3 237.40 38.07 199.32 435.24
4 237.40 26.11 211.28 223.96
5 237.40 13.44 223.96 NIL

PARTIALLY AMORTIZED BONDS- A bond where only a part of principal is paid during the
bond’s life and remaining is paid at maturity as balloon payment.
Here, balloon payment = 20crs
Last year payment will be= 20* (1/1.06) ^5= 20*.747 = 14.94
Now, Cash flow for the period will be (1000-14.94) = 985.06
= 985.06/4.212 = 233.86 till 4th year
th
5 year cash flow will be = 233.86+20= 253.86

Year Investor Cash Interest Principal Outstanding Principal at

Flows Payment Repayment the end of the Year
1 233.86 60 173.86 826.14
2 233.86 49.56 184.3 641.84
3 233.86 38.51 195.35 446.49
4 233.86 26.78 207.08 237.41
5 253.86 14.45 239.41 NIL