Problems Bond Valuation

5-1 CR = 8%
Price = PMT [1-(1/1+i)n] + Par value
i (1+i)n
PV = 80 [1-(1/1+0.09)12] + 1000
0.09 (1.09)12

• PV = 572.85 + 355.53
PV = 928.39
Bonds with Price less than Par value are Discount Bonds.
• Bonds with Price less than Par value are Discount Bonds.
CR = 8%
Market Rate = YTM = 9%
When CR is Less than MR, price of the bond will be less than the par
value and it will be discount bond.
5-1 CR = 12%
Price = PMT [1-(1/1+i)n] + Par value
i (1+i)n
PV = 120 [1-(1/1+0.09)12] + 1000
0.09 (1.09)12
PV =
PV = 1214.8
Bonds with Price greater than Par value are Premium Bonds.
• Bonds with Price greater than Par value are Premium Bonds.
CR = 12%
Market Rate = YTM = 9%
When CR is greater than MR, price of the bond will be higher than the
par value and it will be premium bond.
5-1 CR = 9%
Price = PMT [1-(1/1+i)n] + Par value
i (1+i)n
PV = 90 [1-(1/1+0.09)12] + 1000
0.09 (1.09)12
PV =
PV = 1000
Bonds with Price same as Par value are Par Bonds.
CR = 9%
Market Rate = YTM = 9%
When CR is equal to MR, price of the bond will be equal to the par
value and it will be par bond.
• IRR= YTM= NPV=0
NPV = PV of Cash inflows – PV of Cash outflows
P0 = PMT [1-(1/1+i)n] + Par value
i (1+i)n
Outflow = Inflows
 Aprrox YTM= CP + (v-p/n)
5-2 (V+P/2)
Aprrox YTM= 100 + (1000 -850/12)
(1000+850/2)
= 12.16%
Price = PMT [1-(1/1+i)n] + Par value
i (1+i)n
850 = 100 [1-(1/1+0.12)12] + 1000
0.12 (1+0.12)12
850 = 876.11
NPV = 876.11-850 = 26.11
850 = 100 [1-(1/1+0.13)12] + 1000
0.13 (1+0.13)12
850 = 822.47
NPV = 822.47-850 = - 27.52
I = i+ve + (NPV +ve) (Change in i)
(NPV +ve – NPV –ve)
= 0.12 + [(26.11/ (26.11+27.52)] x (0.01)
YTM = 12.48
P0 = CP [1-(1/1+i)n] + Par value
i (1+i)n
P0 = 100 [1-(1/1+0.08)10] + 1000
0.08 (1+0.08)10
P0 = 1134.20
P1 = 1210.72
% change = (P1 – P0) / P 0
= 6.74
P0 = Par value
(1+i)n
P0 = 1000
(1.08)10
• = 463.19
P0 = 1000
(1.07)10
• = 508.31