SOLUTION

(1)

Coupon payment = CF = 100

N = 5
Face value = 1000
Required rate = 9% = 0.09
Market value = 1050
Bond price = CF (1+i)1 + CF (1+i)2 + CF (1+i)3 + CF (1+i)4 + CF (1+i)5
Bond price = 100 (1+0.09)1 + 100 (1+0.09)2 + 100 (1+0.09)3 + CF 100 (1+0.09)4 + CF 100
(1+0.09)5
Bond price = 92 + 84 + 77 + 71 + 65 + 650 = 1039

The value of bond intrinsic is 1039 which is more than market value i.e. Rs. 1050, if it is
available at less than 1039 I will buy otherwise not.

(2)

Bond price = CF (1+i)1 + CF (1+i)2 + CF (1+i)3 + CF (1+i)4 + CF (1+i)5

Bond price = 100 (1+0.08)1 + 100 (1+0.08)2 + 100 (1+0.08)3 + CF 100 (1+0.08)4 + CF 100
(1+0.08)5
Bond price = 93 + 86 + 79 + 74 + 68 + 681 = 1080

The value is more than market value so it is available at less than 1080 I will buy.

(3)

Bond intrinsic 1039 value is more than it market value Rs. 1050 and if it is available at less than
1039 I will buy otherwise not.
Bond intrinsic 1080 value is more than it market value 1070 and if it is available at less than
1080 I will buy.
Bond of xyz will generate profit because it market value is less than it present or intrinsic value.