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Bond Valuation Tutorial Qns

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24 views

Bond Valuation Tutorial Qns

Uploaded by

mariambhaiji99
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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THE INSTITUTE OF FINANCE MANAGEMENT

BOND VALUATION TUTORIAL QUESTIONS


QUESTION 1
I. What do you understand by the term ‘bonds’
II. What are the risks associated with bonds investment?
III. As an investor, explain three factors that you will consider before investing in bonds.
IV. What is the formula for calculating price of a zero coupon bond?
V. Explain the interest rate risk related to a bond issuer who pays
a. Fixed interest rate
b. Floating interest rate

QUESTION 2
The Tanzanian Government issued perpetual bonds in 2010 with a coupon rate of 3% and
face value of TZS 100. Calculate the price of such a bond in 2022 when the riskless interest
rate in Tanzania is 4.85%.
With a 3% coupon, the TZS 100 bond will pay TZS3 in interest annually forever. Put C = 3
and r = .0485

QUESTION 3
You have bought a zero-coupon bond for TZS 500. It will mature in 6 years and pay the face
value of TZS 100,000. Assuming annual compounding, what is the implied rate of return for
the bond?

QUESTION 4
NOBLE BUSINESS SOLUTION has TZS 1000 bonds, with current yield 12%, will mature
after 10 years. The coupon rate of these bonds is 10%. Calculate their market price and the
yield to maturity.
By definition, the current yield of the bond is equal to the annual interest payment from the
bond, divided by the market value of the bond. Write it as
Current yield = Annual interest payment from the bond/Market price of the bond

QUESTION 5
Determine the present value of a 10 years bond payable with a face value of TZS 100,000 and
stated interest rate of 8%, paid semiannually. The market rate issuance is 10%.

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QUESTION 6
A bond issued by MBS CO. LTD has a coupon rate of 4% per annum, pays semiannual
coupons (i.e two coupons per year) and matures in 10 years. How much would you pay for
Tshs 10,000 face value of this bond if the YTM is 2% per annum?

QUESTION 7
Calculate the price of a bond with a par value of TZS 1,000 to be paid in ten years, a coupon
rate of 10%, and a required yield of 12%. Assume that coupon payments are made semi-
annually.

QUESTION 8
Calculate the price of a zero-coupon bond that is maturing in five years, has a par value of
TZS 1,000 and a required yield of 6%.

QUESTION 9
A firm borrows TZS 1,000 by issuing a bond with coupon rate of 10%, and promises to pay
back the principal in 20 years. If the current market interest rates on a similar bond are 10%,
what is the value of this bond? Is the bond trading at a discount or at par or at a premium?

QUESTION 10
Given a bond with coupon rate = 10%, paid semiannually, YTM = 16%, and matures in 3
years. What is the price of the bond?

QUESTION 11
Given a bond that matures in 2 years and has no coupon payments in the mean time. The
bond is currently selling at TZS 500 and a par value of TZS 1,000. What is the YTM on the
bond?

QUESTION 12
The TZS1,000 face value ABC bond has a coupon rate of 6%, with interest paid semi-
annually, and matures in 5 years. If the bond is priced to yield 8%, what is the bond's value
today.

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QUESTION 13
The TZS 1,000 face value EFG bond has a coupon of 10% (paid semi-annually), matures in 4
years, and has current price of TZS 1,140. What is the EFG bond's yield to maturity?

QUESTION 14
The HIJ bond has a current price of $800, a maturity value of TZS 1,000, and matures in 5
years. If interest is paid semi-annually and the bond is priced to yield 8%, what is the bond's
annual coupon rate?

QUESTION 15
The KLM bond has a 8% coupon rate, with interest paid semi-annually, a maturity value of
TZS1,000, and matures in 5 years. If the bond is priced to yield 6%, what is the bond's
current price?

QUESTION 16
The NOP bond has an 8% coupon rate (semi-annual interest), a maturity value of TZS 1,000,
matures in 5 years, and a current price of TZS 1,200. What is the NOP's yield-to-maturity?

QUESTION 17
A zero coupon bond has the face value of TZS 1000 and the market price is TZS 875. The
bond matures in a year. What is the annual interest rate if it is compounded semi-annually?

QUESTION 18
Consider a bond with TZS 50 annual coupon payment, three years to maturity, and face value
of TZS 1000. The YTM is 10%. What is the market price when compounded semi-annually?

QUESTION 19
A firm borrows TZS1,000 by issuing a bond with coupon rate of 10%, and promises to pay
back the principal in 20 years. If the current market interest rates on a similar bond are 10%,
what is the value of this bond?

QUESTION 20
Given a bond with coupon rate = 10%, paid semiannually, YTM = 16%, and matures in 3
years. What is the price of the bond? What is the effective annual yield?
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