KOLEJ UNIVERSITI TUNKU ABDUL RAHMAN

FACULTY OF ACCOUNTANCY, FINANCE AND BUSINESS

ACADEMIC YEAR 2016/2017

BBMF2023 PRINCIPLE OF INVESTMENT

Tutorial 3: Bonds/Fixed Income Securities

1. Define Yield to Maturity(YTM). Explain the importance of YTM and why it is less
practical to use YTM for the valuation of bond in a callable bond?

2. Given two bonds with identical risk, coupons and maturity date, with the only difference
between the two being that one is callable, which bond will sell for the higher price?

3. Define two characteristics of a bond that determine its reinvestment rate risk?

4. Explain the conditions that affect the bond to be sold at premium or discount.

5. What is the value of a zero-coupon bond paying semiannually that matures in 20 years, has
a maturity of $1 million, and is selling to yield 7.6%? (CFA Question)

6. Suppose a 10-year 9% coupon bond is selling for $112 with a par value of $100. What is
the current yield for the bond? What is the limitation of the current yield measure? (CFA
Question)

7. Determine whether the yield to maturity of a 6.5% 20-year bond that pays interest
semiannually and is selling for $90.68 is 7.2%, 7.4%, or 7.8%. (CFA Question)
Coupon rate = 6.5% /0.065 (annual)
Semiannual = 0.065 / 2
=0.0325

N = 40
Pv =90 .68
Fv = 100

Bond price = C [ 1 - {1/(1 +i )^n }/ I ] + [ FV/ (1 + i)^n]

 7.2%/2 = 3.6%
=[ (0.0325 x100 ) [ 1 - {1/(1 +0.036 )^40 }]/ 0.036 ] + [ 100/ (1 + 0.036)^40]
= 68.34 + 24.30
= 92.64

7.4% /2 = 3.7%
=[ (0.0325 x100 ) [ 1 - {1/(1 +0.037)^40 }]/ 0.037 ] + [ 100/ (1 + 0.037)^40]
= 67.30 + 23.38
= 90.68

7.8%/ 2 = 3.9%
=[ (0.0325 x100 ) [ 1 - {1/(1 +0.039 )^40 }]/ 0.039 ] + [ 100/ (1 + 0.039)^40]
= 65.29 + 21.65
= 86.94

The yield to maturity is 7.4%

.
8. What effect does the use of semiannual discounting have on the value of a bond in relation
to annual discounting?

9. Explain the term "bond immunization" and how can it reduce the interest rate risk.

10. A 10-yr bond is paying 8% coupon compounded annually, with a par value of RM1000. If
it is yield at 6%, estimate the followings:
a) duration of the bond
b) the changes of price for a 25 basis point changes in interest rate

11. Calculate the price of a 30-year bond with 7% coupon rate which is callable in 5 years at a
price of RM1,030. Assume that the yield to call is 7% and coupon payments are made semi-
annually.