QUESTION 3

B Berhad has some surplus funds that it wishes to invest. It requires a return of 15
percent on corporate bonds and you have been asked for advice on whether it
should invest in either of the following bonds which have been offered to it.
Kd = 15%
n=2

[ ]
1
1− n
P0 = I (PVIFA kd,n) + RV (PVIF kd,n) OR ( 1+ k d ) 1
I + RV n
kd ( 1+ k d )

(a) Bond 1: 12% bonds redeemable at nominal at the end of two more years. The
current market value per RM100 bond is RM95.
I = 12, RV =100
Kd = 15%, n = 2

[ ]
1
1−
(1+ 0.15 )2 1
12 + 100
0.15 ( 1+0.15 )2

= 12 [ 1−0.756 1
0.15 ]+100(0.7562)

= 12 [ 1.62 6 ] +100( 0.756 1)

= 19.51 + 75.61
= RM95.12 > RM95, Should purchase it because bond is higher than market price

(b) Bond 2: 8% bonds redeemable at RM110 at the end of two more years. The
current market value is also RM95.
I = 8, RV =110
Kd = 15%, n = 2

[ ]
1
1−
( 1+0.15 )2 1
8 + 110
0.15 ( 1+0.15 )2

= 8 [ 1.626 ] +11 0 (0.7561)

= 13.008 + 83.171
= RM96.18 > RM95, Should purchase it because bond is higher than market price