The

TheValuation
Valuationof
ofLong-Term
Long-Term
Securities
Securities

Bond
BondValuation
Valuation
 GROUP ASSIGNMENT
 Using CAPM, calculate the Required Rate of Return of the companies
(at least 5) belonging to a sector chosen by you.
or
 Compare Operating Cycle and Cash Cycle of the companies (at least
5) belonging to a sector chosen by you.

 Mention the group number, member names, and assumptions you have made in the first
sheet. Use a separate excel sheet for each company. In one sheet compile the required
rate of return for each stock and find the average. Comment on the results in not more
than five sentences.
 The excel sheets should contain all the detailed calculations.
 Data may be sourced from the databases available to you like PROWESS, Capitaline
Plus, or from the websites of NSE or BSE or from any other trustworthy source.
 A report of containing summarised observation from the excel sheets to be submitted
to the faculty.
 The last date of submission is 16 December 2019.
 Important
Important Bond
Bond Terms
Terms
 A bond is a long-term debt
instrument issued by a
corporation or government.
 The maturity value (MV)
MV [or face
value] of a bond is the stated
value.
 Important
Important Bond
Bond Terms
Terms
 The bond’s coupon rate is the stated
rate of interest; the annual interest
payment divided by the bond’s face
value.
 The discount rate (capitalization rate)
is dependent on the risk of the bond
and is composed of the risk-free rate
plus a premium for risk.
 Different
Different Types
Types of
of Bonds
Bonds
A perpetual bond is a bond that never
matures. It has an infinite life.

I I I
V= (1 + kd)1 + (1 + kd)2 + ... + (1 + kd)
 I
= (1 + kd)t or I (PVIFA k )
t=1 d, 

V = I / kd [Reduced Form]
 Perpetual
Perpetual Bond
Bond Example
Example
Bond P has a $1,000 face value and provides an
8% annual coupon. The appropriate discount rate
is 10%. What is the value of the perpetual bond?
bond

I = $1,000 ( 8%) = $80.

$80
kd = 10%.
10%
V = I / kd [Reduced Form]
= $80 / 10% = $800.
$800
 Different
Different Types
Types of
of Bonds
Bonds
A non-zero coupon-paying bond is a
coupon paying bond with a finite life.

I I I + MV
V= (1 + kd)1 + (1 + kd)2 + ... + (1 + kd)n
n I MV
= (1 + kd) t
+
t=1 (1 + kd)n
V = I (PVIFA k ) + MV (PVIF kd, n)
d, n
 Coupon
Coupon Bond
Bond Example
Example
Bond C has a $1,000 face value and provides
an 8% annual coupon for 30 years. The
appropriate discount rate is 10%. What is the
value of the coupon bond?

V = $80 (PVIFA10%, 30) + $1,000 (PVIF10%, 30)

= $80 (9.427) + $1,000 (.057)
= $754.16 + $57.00
= $811.16.
$811.16
 Q1.
 A Rs. 100 par value bond bearing a coupon rate
of 12% will mature after 5 years. What is the value
of the bond if the discount rate is 15%?
 V=12(pvifa 15%,5yrs)+100(pvif 15%,5yrs)
 =89.2
 Different
Different Types
Types of
of Bonds
Bonds
A zero coupon bond is a bond that pays
no interest but sells at a deep discount
from its face value; it provides
compensation to investors in the form
of price appreciation.
MV
V= = MV (PVIFk )
(1 + kd)n d, n

0
 Zero-Coupon
Zero-Coupon
Bond
Bond Example
Example
Bond Z has a $1,000 face value and a
30 year life. The appropriate
discount rate is 10%. What is the
value of the zero-coupon bond?
V = $1,000 (PVIF10%, 30)
= $1,000 (.057)
= $57.00
1
 Semiannual
Semiannual Compounding
Compounding
Most bonds pay interest twice a
year (1/2 of the annual coupon).
Adjustments needed:

(1) Divide kd by 2
(2) Multiply n by 2
(3) Divide I by 2
2
 Semiannual
Semiannual Compounding
Compounding
A non-zero coupon bond adjusted for
semiannual compounding.
I / 2 I / 2 I / 2 + MV
V =(1 + k /2 )1 +(1 + k /2 )2 + ... +
d 2 d 2 2 n
(1 + kd/2 ) *
2*n I/2 MV
= (1 + kd /2 ) t
+
t=1 (1 + kd /2 ) 2*n

= I/2 (PVIFAkd /2 ,2*n) + MV (PVIFkd /2 ,2*n)

3
 Q2
 A Rs. 100 par value bond bears a coupon
rate of 14% and matures after 5 years.
Interest is paid semi-annually. Compute
the value of bond if the required rate of
return is 16% per annum.
 V=7(pvifa 8%,10yrs)+100(pvif 8%,10yrs)
 93.27

4
 Semiannual
Semiannual Coupon
Coupon
Bond
Bond Example
Example
Bond C has a $1,000 face value and provides an
8% semiannual coupon for 15 years. The
appropriate discount rate is 10% (annual rate).
What is the value of the coupon bond?

V = $40 (PVIFA5%, 30) + $1,000 (PVIF5%, 30)

= $40 (15.373) + $1,000 (.231)
[Table IV] [Table II]
= $614.92 + $231.00 = $845.92
5
 Determining
Determining Bond
Bond YTM
YTM
Determine the Yield-to-Maturity
(YTM) for the annual coupon paying
bond with a finite life.
n
I MV
P0 =  (1 + kd )t
+
(1 + kd )n
t=1

= I (PVIFA k ) + MV (PVIF kd , n)
d,n
kd = YTM
6
 Determining
Determining the
the YTM
YTM
You want to determine the YTM for an
issue of outstanding bonds at ICICI
Bank. ICICI has an issue of 10%
annual coupon bonds with 15 years
left to maturity. The bonds have a
current market value of $1,250.
$1,250
What is the YTM?
7
 YTM
YTM Solution
Solution (Try
(Try 9%)
9%)
$1,250 = $100(PVIFA9%,15) +
$1,000(PVIF9%, 15)
$1,250 = $100(8.061) +
$1,000(.275)
$1,250 = $806.10 + $275.00
= $1,081.10
8
 YTM
YTM Solution
Solution (Try
(Try 7%)
7%)
$1,250 = $100(PVIFA7%,15) +
$1,000(PVIF7%, 15)
$1,250 = $100(9.108) +
$1,000(.362)
$1,250 = $910.80 + $362.00
= $1,272.80
9
 Q3.
 The market price of a Rs. 1,000 par value
bond carrying a coupon rate of 14% and
maturing after 5 years is Rs. 1050. What is
YTM pf the bond?
 1050=140(pvifa k,5yrs) +
1000(pvif k,5yrs)
 For k= 13%,
 value=1035.4
 For k= 12%,
 Value = 1071.7
 For value = 1050,
 k= ???

0
 K=12.60%
 Determining
Determining Semiannual
Semiannual
Coupon
Coupon Bond
Bond YTM
YTM
Determine the Yield-to-Maturity
(YTM) for the semiannual coupon
paying bond with a finite life.
2n
I/2 MV
P0 = 
t=1 (1 + kd /2 )
t
+
(1 + kd /2 )2n

= (I/2)(PVIFAk ) + MV(PVIFkd /2 , 2n)

d /2, 2n
[ 1 + (kd / 2)2 ] -1 = YTM
1
 Bond
Bond Price
Price -- Yield
Yield
Relationship
Relationship
Discount Bond -- The market required
rate of return exceeds the coupon rate
(Par > P0 ).
Premium Bond -- The coupon rate
exceeds the market required rate of
return (P0 > Par).
Par Bond -- The coupon rate equals the
market required rate of return (P0 = Par).
2
 Q4
 ABC Heroes Corporation has bonds on the market with 15
years to maturity, a YTM of 10 percent, a par value of $1,000
and a current price of $965. The bonds make semiannual
payments. What must the coupon rate be on ABC Heroes’
bonds?
 965 = C(pvifa 5%,30) + 1000(pvif 5%,30)
 C=47.72
 Annual coupon = 2 x 47.72 = 95.45

3
 Q5
 The J Corporation has two different bonds currently outstanding. Bond
M has a face value of $20,000 and matures in 20 years. The bond makes
no payments for the first six years, then pays $1,100 every six months
over the subsequent eight years, and finally pays $1,400 every six
months over the last six years. Bond N also has a face value of $20,000
and a maturity of 20 years; it makes no coupon payments over the life of
the bond. If the required return on both these bonds is 6 percent
compounded semiannually, what is the current price of Bond M? of Bond
N?
 PM = $1,100(PVIFA3%,16)(PVIF3%,12) + $1,400(PVIFA3%,12)(PVIF3%,28) +
$20,000(PVIF3%,40)
 PM =
 PN = $20,000(PVIF3%,40)
 PN = $6,131.137