Bond Valuation

Bond Pricing and Yield

Q.1. Vijay Packs Ltd. has issued a ` 1,00,000 Zero Coupon Bond that has five years remaining to
maturity and has a yield to maturity of 11 %. What is the current value? If the Bond is traded at
` 74,700, what should an investor do?

Q.2. An investor is considering the purchase of the following Bond:

Face Value ` 100
Coupon Rate 11 %
Maturity 3 Years
If he wants a yield of 13% what is the maximum price he should be ready to pay for?
If the bond is selling for ` 97.60 what would be his yield? (CA Final Nov. 2009)

Q.3. Calculate market price of:

(a) 10% Government of India security quoted at ` 110, but interest rate is expected to go up by
1%.
(b) A bond with 7.5% coupon interest, face value ` 10,000 and term to maturity of 2 years,
presently yielding 6%. Interest is payable half yearly. [Ans: (a) ` 99.10; (b) ` 10,275]
(CA Final Nov. 2010)

Q.4. There is a 9% 5 year bond issue in the market. The issue price is ` 90 and the redemption price is
`105. For an investor with marginal income tax rate of 30 % and capital gains tax of 10%
(assuming no indexation), what is the post tax Yield to maturity (Ytm)? [Ans: 9.3% or 9.49%]
(CA Final May 2004)

Q.5. Axe Inc. is proposing to sell an 8 years bond of ` 1,000 at 10 % coupon rate per annum. The bond
amount will be amortized equally over its life. If an investor has a minimum required rate of return
of 8 %, what is the bond’s present value? [Ans: ` 1,070]

Q.6. A bond is held for a period of 45 days. The current discount yield is 6 percent per annum. It is
expected that current yield will increase by 200 basis points and current market price will come
down by ` 2.50.
Calculate: Face value of the bond & Bond Equivalent Yield.

Q.7. Rajasthan Road Corporation is planning to issue a Bond Series on the following terms:
Face value ` 100
Term of maturity 10 years

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 Yearly coupon rate
14 9%
58 10 %
9 10 14 %
The current market rate on similar bonds is 15 per cent per annum. The Company proposes to
price the issue in such a manner that it can yield 16 per cent compounded rate of return to the
investors. The Corporation also proposes to redeem the bonds at 5 per cent premium on maturity.
Determine the issue price. (CA Final Nov. 2003)

Q.8. Based on the credit rating of the bonds Mr. Amit has decided to apply the following discount rates
for valuing bonds:
Credit rating Discount rate
AAA T-bill rate + 3% spread
AA AAA + 2% spread
A AAA+ 3% spread
He is considering investing in an AA rated, ` 500 face valued bond currently selling at ` 512.93.
The bond has six years to maturity and the coupon rate on the bond is 15% p.a. payable annually.
The next interest payment is due one year from today and the bond is redeemable at par. (Assume
the T-bill rate to be 9%). You are required to
a) Calculate the intrinsic value of the bond for Mr. Amit. Should he invest in the bond?
b) Calculate the current yield and the yield to maturity (YTM) of the bond.
(CA Final Nov. 2008, 2011)

Q.9. Charlie Ltd. issued a new series of bonds on January 1, 2007. The bonds were sold at par (` 1,000),
having a coupon rate 10% p.a. and mature on 31st December; 2022. Coupon payments are made
semiannually on June 30th and December 31st each year. Assume that you purchased an outstanding
Charlie Ltd. bond on 1st March 2015 when the going interest rate was 12 %.
Required:
(a) What was the yield to maturity (YTM) of Charlie Ltd Bonds as on January 1, 2007?
(b) What amount you should pay to complete the transaction? Of that amount how much should be
accrued interest and how much would represent bonds basic value? (CA Final Nov. 2007)

Q.10. Consider two bonds, one with 5 years to maturity and the other with 20 years to maturity. Both the
bonds have a face value of ` 1,000 and coupon rate of 8% (with annual interest payments) and both
are selling at par. Assume that the yields of both the bonds fall to 6%, whether the price of bond
will increase or decrease? What percentage of this increase/decrease comes from a change in the
present value of bond’s principal amount and what percentage of this increase/decrease comes from
a change in the present value of bond’s interest payments? (CA Final May 2009)

Q.11. Mr. X wants to invest 1,00,000 in the 7 years 8% bonds in the market (Face Value 100) which were
issued 2 years ago.
(i) You are requested to advise him what is the maximum price for bonds to be paid in the
following scenarios:
(1) If Mr. X is expecting minimum 9% return on the bonds
(2) If Mr. X is expecting minimum 7% return on the bonds
(3) If the present rate of similar bonds issued is 8.25%

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 (4) If the present rate of similar bonds issued is 7.75%
(ii) If the bonds are available at par and 1% is the transaction what is the effective yield?
(iii)Find the number of days required to breakeven transaction cost if the bonds are available at par
and 2% is the transaction cost. (CA Final Nov. 2022)

Re-Issue of Bonds

Q.12. ABC Ltd. has ` 300 million, 12 per cent bonds outstanding with six years remaining to maturity.
Since interest rates are falling, ABC Ltd. is contemplating of refunding these bonds with a ` 300
million issue of 6 year bonds carrying a coupon rate of 10 per cent. Issue cost of the new bond will
be ` 6 million and the call premium is 4 per cent. ` 9 million being the unamortized portion of
issue cost of old bonds can be written off no sooner the old bonds are called off. Marginal tax rate
of ABC Ltd. is 30 per cent. You are required to analyse the bond refunding decision.
(CA Final May 2009, Dec. 2021)

Q.13. M/s. Trans India Ltd. is contemplating calling ` 3 crores of 30 years, ` 1,000 bond issued 5 years
ago with a coupon interest rate 14%. The bonds have a call price of ` 1,140 and had initially
collected proceeds of ` 2.91 crores due to a discount of ` 30 per bond. The initial floating cost was
` 3,60,000. Company intends to sell ` 3 crores of 12 per cent coupon rate, 25 years bonds to raise
funds for retiring the old bonds. It proposes to sell the new bonds at their par value of ` 1,000. The
estimated flotation cost is ` 4,00,000.
The company is paying 40% tax and it’s after tax cost of debt is 8%. As the new bonds must first be
sold and their proceeds, than used to retire old bonds, the company expects a two months period of
overlapping interest during which interest must be paid on both the old and new bonds. What is the
feasibility of refunding bonds? (CA Final May 2005)

Q.14. XL Ltd. has issued callable 10% bonds with 30 years maturity. The issue size is ` 1 crore with a
face value of ` 1,000 per bond. The bonds have been issued at a discount of 1.2% on the face value
of the bonds in the year 2011. The call option is available to XL Ltd. at the end of 10 years and 20
years from the time of the issue of the bond. the floatation cost was ` 1,50,000.
In the year 2021 XL Ltd, has an opportunity to issue 8% bonds at par with 20 years maturity worth
` 1 crore with a face value of ` 1,000 per bond. The old bonds will be retired with the proceeds of
the proposed issue. The floatation cost of the present issue will be ` 3,00,000.
There will be an overlapping interest for a period of 3 months during course of the present issue.
Post tax cost of debt for XL Ltd. is 7% p.a. The applicable tax bracket is 30%
You are required to advise XL Ltd., whether it can proceed with the proposal.
Given: PVIFA (7%, 20) = 10.594 (CA Final Dec. 2021)

Duration and Volatility

Q.15. Calculate duration of a 6 year bond whose Face Value is ` 1,000 and carries a coupon of 8 %.
Assume the yield to be 8%.

Q.16. Find the current market price of a bond having face value ` 1,00,000 redeemable after 6 year
maturity with YTM at 16% payable annually and duration is 4.3202 years. (CA Final May 2007)
(Coupon Rate 15%, P0 = 96,275)

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Q.17. Consider a bond selling at its par value of ` 1,000, with 6 years to maturity and a 7% coupon rate
(with annual interest payment), what is bond’s duration?
If the YTM of this bond increases to 10%, how does it affect the bond’s duration?
Why should the duration of a coupon carrying bond always be less than the time to its maturity?
(CA Final June 2009) [5.098 years, 5.025 years]

Q.18. The following data are available for a bond:

Face value Coupon Rate Years to maturity Redemption value Yield to maturity
` 1000 16% 6 ` 1000 17%
(a) What is the current market price, duration and volatility of this bond?
(b) Calculate the expected market price, if increase in required yield is by 75 basis points.
(CA Final Nov. 2005, Jan. 2021) [Ans.(a) 964.24, 4.24 years, 3.62, (b) 938.17]

Q.19. The following data are available for a bond:

Face Value ` 10,000 to be redeemed at par on maturity Coupon rate 8.5 per cent per annum
Years to Maturity 5 years
Yield to Maturity (YTM) 10 per cent
You are required to calculate:
(i) Current market price of the Bond,
(ii) Macaulay’s Duration,
(iii)Volatility of the Bond,
(iv) Convexity of the Bond,
(v) Expected market price, if there is a decrease in the YTM by 200 basis points
a) By Macaulay’s Duration based estimate
b) By Intrinsic Value Method. (CA Final Nov. 2020)

Q.20. An investor has recently purchased substantial number of 7 year 6.75% ` 1,000 bond with 5%
premium payable on maturity at a required Yield to Maturity (YTM) of 9%. However, due to a
financial crunch he is looking to sell these bonds and has got a proposal from another investor, who
is willing to purchase these bonds by shelling out a maximum amount of ` 897 per bond. Investors
follow intrinsic value method for valuation of bonds.
(i) You are required to determine
a) The Market Price, Duration and Volatility of the bond and
b) Required YTM of the new investor
(ii) What is relationship between the price of the bond and YTM? (CA Final July 2021)

Q.21. XL Ispat Ltd. has made an issue of 14 per cent non-convertible debentures on January 1, 2018.
These debentures have a face value of ` 100 and is currently traded in the market at a price of ` 90.
Interest on these NCDs will be paid through post-dated cheques dated June 30 and December 31.
Interest payments for the first 3 years will be paid in advance through post-dated cheques while for
the last 2 years post-dated cheques will be issued at the third year. The bond is redeemable at par on
December 31, 2022 at the end of 5 years.
Required:
i. Estimate the current yield and the YTM of the bond.
ii. Calculate the duration of the NCD.

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 iii. Assuming that intermediate coupon payments are, not available for reinvestment calculate the
realised yield on the NCD. (CA Final Nov. 2008)

Q.22. The investment portfolio of a bank is as follows:

Government bond Coupon rate Purchase rate Duration
(F.V.` 100 per bond) (years)
G.O.I.2006 11.68 106.50 3.50
G.O.I.2010 7.55 105.00 6.50
G.O.I.2015 7.38 105.00 7.50
G.O.I.2022 8.35 110.00 8.75
G.O.I.2032 7.95 101.00 13.00
Face value of total investment is ` 5 crores in each government bond.
Calculate actual investment in portfolio.
What is a suitable action to churn out investment portfolio in the following scenario?
1. Interest rates are expected to lower by 25 basis points.
2. Interest rates are expected to raise by 75 basis points.
Also calculate the revised duration of investment portfolio in each scenario.
(CA Final Nov. 2005)
Q.23. Mr. A will need ` 1,00,000 after two years for which he wants to make one time necessary
investment now. He has a choice of two types of bonds. Their details are as below:
Bond X Bond Y
Face value ` 1,000 ` 1,000
Coupon 7% payable annually 8% payable annually
Years to maturity 1 4
Current price ` 972.73 ` 936.52
Current yield 10% 10%
Advice Mr. A whether he should invest all his money in one type of bond or he should buy both
bonds and if so, in which quantity? Assume that there will not be any call risk or default risk.
(CA Final Nov. 2015) [No. of Bonds to buy Bond X = 51.82, Bond Y = 34.42]

Q.24. An investor has recently purchased substantial number of 7 year 6.75% 1,000 bond with 5%
premium payable on maturity at a required Yield to Maturity (YTM) of 9%. However, due to a
financial crunch he is looking to sell these bonds and has got a proposal from another investor, who
is willing to purchase these bonds by selling out a maximum amount of 897 per bond. Investors
follow intrinsic value method for valuation of bonds.
(i) You are required to determine
(1) The Market Price, Duration and Volatility of the bond and
(2) Required YTM of the new investor
(ii) What is relationship between the price of the bond and YTM?
(CA Final July. 2021)

Forward Rates

Q.25. The following table represents the yield curve of a particular type of bonds issued by a company
having a face value of ` 1,000.
Maturity period (Years) YTM%

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 1 10
2 11
3 12
(i) Calculate the implied one year forward rates.
(ii) Expected Yield to Maturiy and prices of 1 year and 2 year Bonds at the end of the first year.
(CA Final Jan 2021) [Ans. 10%, 12.009%, 14.027%, 892.78, 782.93]

Q.26. The following is the Yield structure of AAA rated debenture –

Period 3 Months 6 Months 1 Year 2 Years 3 Years and above
Yield (%) 8.5 9.25 10.50 11.25 12.00
(i) Based on the expectation theory calculate the implicit one-year forward rates in year 2 and 3.
(ii) If the interest rate increased by 50 basis points, what will be the percentage change in the price
of the bond having a maturity of 5 years? Assume that the bond is fairly priced at the moment
at ` 1,000. (CA Final Nov. 2008)

Q.27. If the 1 year spot is 5%, 1 year forward starting one year from is 6.9% and 1 year forwards two
years from today is 8%, what is three year spot rate?
Q.28. Consider the following data for government securities:
Face value (`) Interest Rate % Maturity (years) Current price (`)
1,00,000 0 1 91,000
1,00,000 10.5 2 99,000
1,00,000 11.0 3 99,500
1,00,000 11.5 4 99,900
Calculate the forward interest rates. [Ans: f1= 9.9%, f2 = 12.4%, f3 = 11.5%, f4 = 12.8%]
(CA Final May 2010)
Q.29. ABC Ltd. issued 9%, 5 year bonds of ` 1,000 having a maturity of 3 years. The present interest
rate is 12% for one year tenure. It is expected that forward rate of interest for one year tenure is
going to fall by 75 basis points and further by 50 basis points for every next year in future for the
same tenure. This bond has beta of 1.02 and is more popular due to less credit risk.
Calculate:
(i) Intrinsic value of bond.
(ii) Expected price of bond in market.
(CA Final Nov. 2013)

Convertible Bonds

Q.30. A convertible bond with a face value of ` 1,000 is issued at ` 1,350 with a coupon rate of
10.5%. The conversion rate is 14 shares per bond. The current market price of bond and share is
` 1,475 and ` 80 respectively. What is the premium over conversion value?
(CA Final Nov. 2010)
Q.31. Pineapple Ltd has issued fully convertible 12 percent debentures of ` 5,000 face value,
convertible into 10 equity shares. The current market price of the debentures is ` 5,400. The
present market price of equity shares is ` 430. Calculate:
(i) The conversion value,
(ii) The conversion percentage premium. [(i) ` 4,300 (ii) 25.58%]

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Q.32. The data given below relates to a convertible bond:
Face value ` 250
Coupon rate 12%
No. of shares per bond 20
Market price of share ` 12
Straight value of bond ` 235
Market price of convertible bond ` 265
Calculate:
(i) Conversion price
(ii) Conversion value of bond or Stock value of bond.
(iii) The percentage of downside risk.
(iv) The conversion premium
(v) The conversion parity price of the stock (Market Conversion Price).
(CA Final Nov. 2008 , July 2021)

Q.33. GHI Ltd., AAA rated company has issued, fully convertible bonds on following terms, a year
ago:
Face value of bond ` 1000
Coupon (interest rate) 8.5%
Time to Maturity (remaining) 3 years
Interest Payment Annual, at the end of year
Principal Repayment At the end of bond maturity
Conversion ratio (Number of shares per bond) 25
Current market price per share ` 45
Market price of convertible bond ` 1175
AAA rated company can issue plain vanilla bonds without conversion option at an interest rate of
9.5%. Required: Calculate as of today:
(i) Straight Value of bond.
(ii) Conversion Value of the bond.
(iii) Conversion Premium.
(iv) Percentage of downside risk.
(v) Conversion Parity Price. (CA Final May 2014, Nov. 2022)
[(i) ` 974.96 (ii) ` 1,125 (iii) ` 2 per share or ` 50 Total, (iv) 20.52%, (v) ` 47 ]

Q.34. Saranam Ltd. has issued convertible debentures with coupon rate 12%. Each debenture has an
option to convert to 20 equity shares at any time until the date of maturity. Debentures will be
redeemed at ` 100 on maturity of 5 years.
An investor generally requires a rate of return of 8% p.a. on a 5-year security.
As an investor when will you exercise conversion for given market prices of the equity share of
(i) ` 4, (ii) ` 5 and (iii) ` 6.
Cumulative PV factor for 8% for 5 years : 3.993
PV factor for 8% for year 5 : 0.681

Q.35. Sabanam Ltd. has issued convertible debentures with coupon rate 11%. Each debenture has an
option to convert to 16 equity shares at any time until the date of maturity. Debentures will be
redeemed at ` 100 on maturity of 5 years. An investor generally requires a rate of return of 8%

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 p.a. on a 5-year security. As an investor when will you exercise conversion for given market
prices of the equity share of (i) ` 5, (ii) ` 6 and (iii) ` 7.10.
Cumulative PV factor for 8% for 5 years : 3.993
PV factor for 8% for year 5 : 0.681
(CA Final May 2018)
Q.36. The HLL has ` 8.00 crore of 10% mortgage bonds outstanding under an open-end scheme. The
scheme allows additional bonds to be issued as long as all of the following conditions are met:
(1) Pre-tax interest converge (Income before tax + Bond Interest / Bond Interest) remains
greater than 4.
(2) Net depreciated value of mortgage assets remains twice the amount of the mortgage debt.
(3) Debt-to-equity ratio remains below 0.5.
The HLL has net income after taxes of ` 2 crores and a 40% tax-rate, ` 40 crores in equity and
` 30 crores in depreciated assets, covered by the mortgage. Assuming that 50% of the proceeds
of a new issue would be added to the base of mortgaged assets and that the company has no
Sinking Fund payments until next year, how much more 10% debt could be sold under each three
conditions? Which protective covenant is binding? (CA Final May 2001)

Q.37. P Ltd. has current earnings of ` 6 per share with 10,00,000 shares outstanding. The company
plans to issue 80,000, 8% convertible preference shares of ` 100 each at par. The preference
shares are convertible into 2 equity shares for each preference share held. The equity share has a
current market price of ` 42 per share. Calculate:
1. What is preference share’s conversion value?
2. What is conversion premium?
3. Assuming that total earnings remain the same, calculate the effect of the issue on the basic
earning per share (A) before conversion (B) after conversion
4. If profits after tax increases by ` 20 Lakhs what will be the basic EPS, (A) before conversion
and (B) on a fully diluted basis?
(CA Final May 2017)

Money Market Instrument

Q.38. RBI sold a 91-day T-bill of face value of ` 100 at an yield of 6%. What was the issue price?

Q.39. Wonderland Limited has excess cash of ` 20 lakhs, which it wants to invest in short term
marketable securities. Expenses relating to investment will be ` 50,000.
The securities invested will have an annual yield of 9%. The company seeks your advice
(i) as to the period of investment so as to earn a pre-tax income of 5%. (discuss)
(ii) the minimum period for the company to breakeven its investment expenditure overtime value
of money.

Q.40. Z Co. Ltd. issued commercial paper worth ` 10 crores as per following details:
Date of issue : 16th January, 2023
Date of maturity : 17th April, 2023
No. of days : 91
Interest rate : 12.04% p.a
What was the net amount received by the company on issue of CP? (Charges of intermediary may
be ignored)