MAN312 FINANCIAL MANAGEMENT Bond Valuation Tutorial Solutions Question 1, Winston Enterprises has a 15-year bond issue outstanding that pays a 9 per cent coupon. The bond is currently priced at R894,60 and has a par value of R1 000. Interest is paid semi-annually. What is the yield to maturity? Using the formuta: anitsted oppent 000 ‘This cannot be solved directly, so the easiest way is to just use the financial calculator to get an answer. You ccan then use the calculator answer as the rate in the formula just to verify that your answer is correct. ‘The coupon is = 0.09 x R1000 =R90 per year > Semi-annual coupon = R9OI 45 ‘The number of payment periods = 15x 2=30 In the financial ca tars Enter 30N 894,00 BV 45 PMT 1 000 FY and solve for IARR = 5,201 ‘The yield-to-maturity quoted per annum = 5,201 x 2= 10,40 per cent Question 2, Party Time, Inc. has a 6 per cent coupon bond that matures in 11 years. The bond pays interest semi-annually. What is the market price of a RI 000 face value bond if the yield to maturity is 42,9 per cent? Using the formula P = R347,53 + R252,81 = R6OO34 Using the financial caleulator: The coupon is = 0.06 x R1000 = R60 per year Semi-annual coupon = R6O/2 = R30 The number of payment periods = [1 x 2.= 22 Yield-to-maturity (semi-Annual) = 12,9/2 = 6,45 per cent Enter 22N 645 VYR 30 PMT. 1000 FY and solve for PY = -600,34Question 3. Buti’s Co. offers a zero coupon bond with an 11,3 per cent yield to maturity. The bond matures in 16 years, What is the current price of a RI 000 face value bond? Using the formula: te 180,33 Using the financial calculator; Enter = 16N11,3TR 1 000 FY and solve for PY = -180,33 Question 4. Mandla’s Motor Corp. Bonds offer a 6 per cent coupon at a current market price of R989, The bonds have a face value of R1 000 and a call price of RI 020. What is the current yield on these bonds? Coupon 0,06x R1000 i 789 0,06067 = 6,07 per cent rice Current yield = Question 5, The bonds offered by Leo’s Pumps are callable in 3 years ata quoted price of 101. What isthe amount ofthe call premium on a RI 000 par value bond? Call premium = Call price ~ Face value =(1,01%R1 000)- RI 000= R10 Question 6. The semi-annual, ten-year bonds of Mama Africa Ltd are selling at par and have an effective annual yield of 4,295 per cent. What isthe amount of each interest payment on a RI 000 bond? 004295=(142)?-1 > — r=0.0425 = 4.25% 2 Because the bond is selling at par, the annual percentage rate (APR) and the coupon rate are equal. 0,0425x RI 000 "Ths, the seri-nna interest payment =————— = R218