Ralph Gabriel S.

Baldonado COAS2-A

Problem: 5-year, P10,000 Debenture bond, 10% p.a. interest payable annually is
offered to Joy at 98. At the time the bond is offered to Joy, it has 3 years remaining
life. Joy wants a required rate of return of 12%
Required:
a. What is the value of the bond if the required rate of return of Joy is 12% p.a.
Should Joy purchase the bond?
PV of Principal = 10,000 x 0.712 = 7,120
PV of Interest = 1,000 x 2.402 = 2,402
Value of Bond at 12% = 9,522

Joy should not purchase the bonds because the present value is 9,522 which is lower
than the buy price of the bonds.

b. What is the value of the bond if the required rate of return of Joy is 8% p.a. Should
Joy purchase the bond?
PV of Principal = 10,000 x 0.794 = 7,940
PV of Interest = 1,000 x 2.577 = 2,577
Value of Bond at 8% = 10,517

Joy should purchase the bonds because the present value of the bonds is 10,517 which
is higher than the purchase price of the bonds.

c. What is the value of the bond if the required rate of return of Joy is 10% p.a. Should
Joy purchase the bond?
PV of Principal = 10,000 x 0.751 = 7,510
PV of Interest = 1,000 x 2.487 = 2,487
Value of Bond at 10% = 9,997

Joy should purchase the bonds because the present value of the bonds is 9,997 which
is higher than the purchase price of the bonds.

This study source was downloaded by 100000842961867 from CourseHero.com on 04-11-2023 11:00:41 GMT -05:00

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 Assuming the interest of the bond is paid semi-annually, Compute for the value of the
bond and whether Joy will purchase the bond, if her required rate of return is:
1. 12% p.a.
PV of Principal = 10,000 x 0.705 = 7,050.00
PV of Interest = 500 x 4.917 = 2,458.50
Value of Bond at 12% = 9,508.50

Joy should not purchase the bonds because the present value is 9,508.50 which is
lower than the buy price of the bonds.

2. 10% p.a.
PV of Principal = 10,000 x 0.746 = 7,460
PV of Interest = 500 x 5.076 = 2,538
Value of Bond at 10% = 9,998

Joy should purchase the bonds because the present value of the bonds is 9,998 which
is higher than the purchase price of the bonds.

3. 8% p.a.
PV of Principal = 10,000 x 0.790 = 7,900
PV of Interest = 500 x 5.242 = 2,621
Value of Bond at 8% = 10,521

Joy should purchase the bonds because the present value of the bonds is 10,521 which
is higher than the purchase price of the bonds.

This study source was downloaded by 100000842961867 from CourseHero.com on 04-11-2023 11:00:41 GMT -05:00

https://www.coursehero.com/file/90243900/FINMA-Bond-Valuation-Assignmentdocx/
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