Scribd
Upload
662 views

Exercises Topic 2 With Answers

This document provides examples of bond valuation calculations. It defines junk bonds and provides calculations to determine the value of bonds given their coupon rate, face value, time to maturity, and required rate of return. It includes examples of calculating bond prices, expected rates of return, and determining if a bond should be purchased or not based on whether the market price is higher than the calculated fair value. Duration is also defined as a measure of a bond's sensitivity to interest rate changes. Finally, examples are given to determine which of three bonds would sell at a discount, premium, or par value without calculations, and how the values would change over time under given conditions.

Uploaded by

fatehah
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
662 views

Exercises Topic 2 With Answers

This document provides examples of bond valuation calculations. It defines junk bonds and provides calculations to determine the value of bonds given their coupon rate, face value, time to maturity, and required rate of return. It includes examples of calculating bond prices, expected rates of return, and determining if a bond should be purchased or not based on whether the market price is higher than the calculated fair value. Duration is also defined as a measure of a bond's sensitivity to interest rate changes. Finally, examples are given to determine which of three bonds would sell at a discount, premium, or par value without calculations, and how the values would change over time under given conditions.

Uploaded by

fatehah
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

Topic 2: EXERCISES

1. Junk bonds refer to any bond with a rating of BB or below

2. Calculate the value of bond that matures in 12 years and has RM1,000 face value. The coupon interest rate is 8 percent and the investor’s
required rate of return is 12 percent.
Vb = 80 (PVIFA 12%,12) + 1000 (PVIF 12%,12)
= 80 (6.1944) + 1000 (0.2567)
= RM752.25

3. Enterprise, Inc. 10-year bond has a 9 percent coupon rate paid semi annually. This bond has been issued 2 years ago. If your required rate of
return is 10 percent, what is the value of the bond?
Vb = 45 (PVIFA 5%,16) + 1000 (PVIF 5%,16)
= 45 (10.8378) + 1000 (0.4581)
= RM945.80

4. The market price is RM900 for a 10-year bond that pays 8 percent coupon semiannually. What is the bond’s expected rate of return?

YTM/2 = ($40 + (1000 - $900)/20)


(1000 + 900)/2
= 0.0474 X 2
= 9.47%

5. Chikky Industries 15-year, RM1,000 par value bonds pay 8 percent coupon annually. The market price of the bonds is RM1,085.

a) Compute the bond’s expected rate of return. 7.13%


b) Determine the value of the bond to you if your required rate of return is 10 percent. RM847.89
c) Should you purchase the bond? Why? NO because overpriced …..MarketPrice RM1085 > Fair value RM847.89
or
(10% > 7.13% )

6. X is holding a bond with 25 years of maturity at a coupon rate of 8% which pays annually. After holding the bond for 10 years, X plans to sell
it. Y is interested to buy the bond from X.
a. Thus, Y need to know the fair value of the bond today if your required rate of return is 12%

Vb= 80 (PVIFA 12%,15) + 1000 (PVIF 12%,15)


= RM727.50

b. Will Y buys the bond if X plans to sell it at RM800? Why?


RM800 > RM727.50, will NOT buy the bond.

7. Aragon Co. has 10% coupon bonds on the market with 9 years left to maturity. The bonds make annual payments. If the bond currently sells
for RM884.50, what is the current yield?
RM100/RM884.50
= 11.30%

8. Duration is a measure of a bond's sensitivity to interest rate changes. The greater duration of the bond, the greater its percentage price
volatility.

9. Given below is the information of three RM1,000 par value bonds, paying interest semi-annually.

Bond Coupon rate Required rate Maturity


(%) of return (%)
(Years)

A 6 10 10

B 10 8 15

C 12 12 20
Topic 2: EXERCISES

Without performing any calculation,

a) Determine which bond would sell at discount, at par value, or at premium.

BOND VALUE

A at discount

B at premium

C at par

b) What will happen to the value of each bond over time if the respective interest rates remain as it is until the bonds mature?

BOND VALUE

A rise in value until maturity

B fall in value until maturity

C at par value until maturity

10 (a) What is the present value of 10 years bond Mon Space, RM1,000 par value with 12 percent zero coupon bond?

PV = 1000/(1.12)10

= RM322

(b) Based on the information on the following bonds, which bonds would you invest in? Explain your answer.

M.Fros LC Wei
Coupon interest rate 8%, semi- annual 7.5% annually
Years to maturity 10 15
Market price RM973 RM1,035
Par value RM1,000 RM1,000
Required return 9% 6%

MFros LC Wei

40(PVIFA 4.5, 20) + 1000(PVIF4.5, 20) 75(PVIFA 6%, 15) + 1000 (PVIF6%, 15

= 40 (13.00) + 1000 (0.41464) = 75(9.7122) + 1000 (0.41727)

= RM520.32+ 414.64 = 728.42 + 417.27

= RM934.96 < RM973 = RM1,145.69 > RM1,035

CHOOSE BOND LCW SINCE VALUE HIGHER THAN MARKET PRICE

You might also like