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BOND VALUATION
 CHAPTER
BOND VALUATION
INTRODUCTION
The company issues bond which is an instrument used to raise finance. The bond
may be issued for the certain period or it may be issued for infinite period. The
company pays interest over the life of the bond at coupon interest rate.

CALCULATION OF INTEREST ON BOND

The amount of interest is calculated with reference to face value of bond.

Amount of interest = face value x coupon rate

VALUE OF THE BOND

The company pays the redeemable value of bond at its redemption. The investor has
certain expected rate of return on the amount invested. This required rate of return
is used as discount rate to find intrinsic value of bond i.e. present value of the bond
at which the required rate of return will be available to the investor over the life of
the bond.

VALUE OF IRREDEEMABLE BOND

If the bond is an irredeemable bond then the investor will receive interest at timely
intervals for infinite period. In this case:

Annual interest
Current value of bond = -------------------
% rate of return

If the bond is held for infinite period and the requirement of rate of return is satisfied
then the required rate of return is equal to available rate of return. The available rate
of return is known as yield to maturity (YTM). Hence this YTM is used as discount
rate OR capitalization rate.

VALUE OF REDEEMABLE BOND

There will be receipt of interest and maturity value (Redeemable value). The present
value of inflows in the form of interest and redeemable value which will satisfy the
requirement of investors is the value of the bond.
Normally bond is discounted with YTM as discount rate. YTM is available return. The
discounted value at YTM shows the fair value of the bond. YTM is similar to IRR
(Internal rate of return) used in capital budgeting.

FORMAT OF VALUE OF BOND

Year Cash inflows PVF @ discount Present value
rate
1 Xx Xx Xxx
2 Xx Xx Xxx
3 Xx Xx Xxx
4 Xx Xx Xxx
5 Xx + xx Xx Xxx
xxx
VALUE OF IRREDEEMABLE BOND
Q. 1. A bond pays ` 90 interest annually into perpetuity.
(1) What is its value if the current yield is 10%.
(2) If the current yield changes to 8% and 12%, then what is its value?
Ans: (1) ` 900; (2) ` 1,125; ` 750
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Q. 2. A bond has a face value of ` 1,000 and coupon rate of 8%. Find out its value if
the required rate of return is 6% if the bond is perpetual.
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VALUE OF REDEEMABLE BOND
Q. 3. A is willing to purchase 5 years ` 1,000 par value bond having a coupon rate of
9%. A’s required rate of return is 10%. How much A should pay to purchase the bond
if it matures at par?
Ans: ` 962
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Q. 4. A bond of ` 100 bearing a coupon rate of 12% is redeemable at par in 10 years.
Find out the value of the bond, if required rate of return is 12%.
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Q. 5. An investor is considering the purchase of a 5-year bond with a face value of `
100 and bearing a coupon rate of 12% p.a. the bond will be redeemed in two equal
installments starting from fourth year.
If investor’s required rate of return is 11%, what price he should be willing to pay for
it?
Years 1 2 3 4 5
PV factor @ .901 .812 .731 .659 .593
11%
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Q. 6. Consider a 10-year, 1.2% p.a. coupon bond with a par value of ` 10,000. Assume that
required yield on this bond is 13%. Find out the value of the bond.
PVIFA @ 13% for 10 years = 5.426; PVIF @ 13% for 10th year = .295
Ans: 3,601;
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Semi-annual interest rate
Q. 7. Consider an 8-year, 12% coupon bond with a par value of ` 1,000 on which interest is
payable semi-annually. The required rate of return on this bond is 14%. Find out the value of
the bond.
PVIFA @ 7% for 16 periods = 9.447; PVIF @ 7% for 16th period = .339;
Ans: 396;
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T-Bill Yield
Q. 8. The face value of a 182-day T-bill is ` 100. If the purchase price is ` 98.5 after 10
days of issue, calculate the yield of the T-bill. (December 2021)
Ans: 3.23%
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Q. 9. Mr. sharma is considering purchase of a bond which is currently quoting at `
800. The bond has a face value of ` 1,000. It carries a coupon rate of 14% and has
5 years to maturity. Mr. sharma has required rate of return of 18%.
(1) Advise Mr. sharma whether the bond is worth buying?
(2) Would your answer change if interest income is subject to 30% rate of tax and
capital gain is subject to 10% rate of tax?
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VALUE OF DEBENTURES
Q. 10. The following information is available in respect of 12% debentures:
Face value ` 100
Redemption value ` 110
Maturity period 5 years
Find out the maximum price an investor should be ready to pay if his required rate
of return is 10%, 12% or 14%.
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Q. 11. The ABC ltd. is contemplating a debenture issue on the following terms:
Face value Rs. 100 per debenture
Term of maturity 6 years
Coupon rate of interest:
Years 1-2 10% p.a.
3-4 12% p.a.
5-6 14% p.a.
The current market rate of interest on similar debenture is 13% p.a. The company
proposes to price the issue so as to yield a compounded rate of return of 16% p.a.
to the investors. Assuming the redemption on debenture at a premium of 10%
determine the issue price.
Ans: Rs. 88
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Q. 12. The ABC ltd. is contemplating a debenture issue on the following terms:
Face value Rs. 10,000 per debenture
Term of maturity 7 years
Coupon rate of interest:
Years 1-3 7% p.a.
4-5 8% p.a.
6-7 9% p.a.
The current market rate of interest on similar debenture is 11% p.a. The company
proposes to price the issue so as to yield a compounded rate of return of 12% p.a.
to the investors. Assuming the redemption on debenture at par, determine the issue
price.
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Q. 13. A company proposes to sell 15% debentures of ` 10,000 each redeemable at
par after 10 years:
(1) At what price, debentures should be issued in order to provide the investors a
yield of 16%.
(2) What should be the price if the company decides to repay ` 1,000 at the end of
each year (instead of redeeming the whole amount after 10 years) and to pay interest
annually at the rate of 15% on the outstanding amount
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Q. 14. A company is planning to issue debentures carrying a coupon rate of 6% p.a.
(face value ` 1,000) which will be redeemed after 3 years at its par value. If the
investor’s required rate of return is 10%, what should be the value of the debentures
if:
(1) Interested is payable annually;
(2) Interested is payable semi-annually.
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PRESENT VALUE OF DEPOSIT
Q. 15. Mr. Sachin is being offered a scheme in which he has to deposit ` 18,250 now
which will give him a return of 5,000 for each of next 5 years. Should he accept the
offer if his required rate of return is?
(1) 10%;
(2) 12%;
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SEMI-ANNUAL COUPON RATE
Q. 16. A company’s bonds have a par value of Rs 100, maturity in seven years, and
carry a coupon rate of 12% payable semi-annually. If the appropriate discount rate
is 16%, what price should the bond command in the market place?
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Q. 17. A company issued 12% bonds with 3 years maturity. Bond is redeemable at
par at ` 1,000. What would be the value of this bond assuming interest is paid?
(1) Annually;
(2) Semi-annually?
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Q. 18. A company issued 6% debenture with 3 years maturity. Bond is redeemable
at par at ` 1,000. Investor required rate of return is 10%. What would be the value
of this bond assuming interest is paid?
(1) Annually;
(2) Semi-annually?
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 YIELD TO MATURITY
CURRENT YIELD
Q. 1. A 13% bond interest payable annually is issued at Rs. 100. Its market price is
Rs. 112. Compute current yield.
Ans: 11.61%
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YIELD TO MATURITY (YTM)
Q. 2. A 5 years bond with 8% coupon rate and maturity value of Rs. 1,000 is currently
selling at Rs. 925. What is its YTM?
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Q. 3. A bond of ` 10,000 bearing coupon rate 12% and redeemable in 8 years at
par is being traded at ` 10,600. Find out the YTM of the bond.
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Q. 4. The market price of a Rs. 1000 par value bond carrying a coupon rate of 14
percent and maturing after five years is Rs. 1050. What is the yield to maturity (YTM)
on this bond?
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Q. 5. Current market price of a bond is ` 1,052 (FV = ` 1,000). Coupon rate is 10%
and interest is payable semi-annually. The remaining life of the bond is 3 years. Find
out the YTM.
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Q. 6. A ` 1,000 par value bond carrying a coupon rate of 9% p.a. and maturing after
six years is currently selling for ` 850. What is the:
(1) Current yield;
(2) Yield to maturity (YTM) of the bond;
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Q. 7. Calculate the following measures of a bond which has coupon rate of 10%, face
value ` 500 and maturity period 3 years, maturity value ` 510 and current market
price ` 480.
(1) Current yield;
(2) Yield to maturity;
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Q. 8. The following information is available in respect of a bond:
Face value ` 10,000
Market price ` 8,790
Coupon rate 8%
Investor’s yield 10%
Time to maturity 5 years
Find the YTM and intrinsic value of the bond. Should the investor buy the bond on
the basis of YTM and intrinsic value?
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Q. 9. An investor is considering the purchase of the following bond:
Face value ` 100
Coupon rate 11%
Maturity 3 years
(1) If he wants a yield of 13%, what is the maximum price he should be ready to
pay for it?
(2) If the bond is selling for ` 97.60, what should be his yield?
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Q. 10. Mr. N. M. Das is considering investing in a bond currently selling for Rs.
8785.07. The bond has four years to maturity, a Rs. 10,000 face value and 8 per
cent coupon rate. The next annual interest payment is due one year from today. The
approximate discount factor for investments of similar risk is 10 per cent.
(1) Calculate the value of the bond. Base on this calculation should Mr. Das purchase
the bond.
(2) Calculate the YTM of the bond.
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Q. 11. The following information is given regarding a bond:
Face value ` 100
Coupon rate 12%
Maturity 4 years
Redemption value ` 120
Compute:
(1) The value of the bond when the opportunity cost of capital is 15%?
(2) What would be its yield to maturity if the current market price of this bond is
` 94?
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Q. 12. The bond with face value of ` 100 are currently available at ` 96 in the market.
The coupon rate is 14% p.a. The maturity time is 5 years and interest is paid annually.
Compute the yield to maturity of this bond. What would be your answer if the current
selling price is ` 105 instead of ` 96?
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Q. 13. The bond (of the face value of ` 1,000) is available in the market for ` 780. It
has coupon rate of 6% and maturity period of 8 years. If the bond is redeemable at
par. Compute:
(1) Yield to maturity of the bond.
(2) If the required rate of return of an investor is 12%, should he purchase the bond?
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Q. 14. A 12% bond of ` 100 is available in the market at ` 95. The interest is payable
semi-annually. The bond will mature in 5 years from now. Compute yield to maturity
(YTM) of this bond. What will be the value of the bond if the required rate of return
of an investor is 14%? Should he buy the bond?
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Q. 15. A 14% bond of ` 100 is available in the market at ` 90. The interest is payable
semi-annually. The bond will mature in 5 years from now. Compute yield to maturity
(YTM) of this bond. What will be the value of the bond if the required rate of return
of an investor is 16%? Should he buy the bond?
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Q. 16. An investor buys a 10% bond (FV = 1,000) for ` 1,029 today. The remaining
maturity period is 4 years when it would be redeemed at par find out the YTM?
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Q. 17. The following information is available in respect of a bond:
Face value ` 1,000
Market price ` 879
Coupon rate 8%
Investor’s yield 10%
Time to maturity 4 years
Find the YTM and intrinsic value of the bond. Should the investor buy the bond on
the basis of YTM and intrinsic value?
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Q. 18. Mr. Ashutosh is considering investing in one of the following bonds:
Bond A Bond B
Face value ` 1,000 ` 1,000
Coupon rate 12% 10%
Time to maturity 10 years 7 years
Current market price ` 700 ` 600
If Mr. Ashutosh income is taxed @ 30% and capital gain is taxed @ 10%, find the
post-tax yield to maturity from these bonds using approximation method. Which bond
should be selected by Mr. Ashutosh?
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Q. 19. A bond with face value of ` 100 is currently available at ` 97 in the market.
The coupon rate is 12% p.a. The maturity time is 5 years and interest are paid semi-
annually.
Compute the semi-annually yield to maturity of this bond. What would be your
answer if the current selling price is ` 110 instead of ` 97.
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Q. 20. A company contemplates to issue a bond (Face value ` 100) with 7 years of
life. The bond is to be redeemed at 10% premium; the coupon rate for the first 2
years is 12%, for next two years it is 15% and 18% for the rest of the life.
Compute:
(1) The value of the bond when the desired rate of return by the bondholders is 15%.
(2) Suppose the bond is currently selling at ` 100 in the market, what would be its
yield to maturity?
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YIELD TO CALL (YTC)
Q. 21.
Market price ` 107
Face value ` 100
 Coupon rate 12%
Date of purchase 1-1-2014
Maturity date 31-12-19
Callable on 1-1-16
Interest payable Annually
Maturity/callable value ` 105
Calculate YTC of the bond.
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Q. 22. From the following information, calculate yield to call and yield to maturity of
the bond:
Face value ` 1,000
Coupon rate 10%
Time to maturity 8 years
Time to call 3 years
Market price ` 1,100
Bonds are callable/redeemable at par.
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Q. 23. An investor has the following information on a bond:
Face value ` 10,000
Coupon rate 10%
Market price ` 10,500
Find the yield to maturity, yield to call if callable in 5 years at ` 10,800.
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Straight value of Bond
Q. 24. SROIC ltd., AAA rated company has issued, fully convertible bonds on the following
terms, year ago:
Face value of Bond ` 1,000
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
AAA rated company can issue plain vanilla bonds without conversion option at an interest
rate of 9.5%. Calculate Straight value of bond.
Ans: 975 Approx.
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Conversion value of Bond
Q. 25. SROIC ltd., AAA rated company has issued, fully convertible bonds on the following
terms, year ago:
 Conversion ratio (Number of shares per bond) 25
Current market price per share `45
Ans: 1,125;
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Conversion parity Price
Q. 26. The data given below relates to a convertible bond:
Conversion ratio 20
Market price of convertible bond ` 265
Calculate the % of Downside Risk.
Ans: 13.25;
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Conversion Premium
Q. 27. SROIC ltd., AAA rated company has issued, fully convertible bonds on the following
terms, year ago:
Conversion ratio (Number of shares per bond) 25
Current market price per share `45
Market price of convertible bond ` 1,175
Ans: 2;
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% of Downside Risk
Q. 28. The data given below relates to a convertible bond:
Straight value of bond ` 235
Market price of convertible bond ` 265
Calculate the % of Downside Risk.
Ans: 12.77%;
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J2023S2022QN4A
Q. 29. SROIC ltd., AAA rated company has issued, fully convertible bonds on the following
terms, year ago:
Face value of Bond ` 1,000
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 ` 1,175
AAA rated company can issue plain vanilla bonds without conversion option at an interest
rate of 9.5%.
Required:
Analyze the above data to calculate the following:
(1) Straight value of bond.
(2) Conversion value of the Bond.
(3) Conversion Premium.
(4) Percentage of Downside Risk.
(5) Conversion Parity Price.
Given:
Year 1 2 3 4
PVIF 0.095, t .9132 .8340 .7617 .6956
Ans: (1) 975 Approx. (2) 1,125; (3) 2; (4) 20.52%; (5) 47;
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D2023S2022QN4A
Q. 30. Following information is related to the convertible bond of SONTA ltd. which is
currently priced at ` 1,060 per bond:
Conversion parity price ` 53
Conversion premium 10.41667%
% of downside risk with respect to straight value of bond 12.766%
Required:
(1) Calculate number of shares on conversion.
(2) Analyze current market price per share of SONTA ltd.
(3) Assess the straight value of the bond.
Ans: (1) 20; (2) 48, (3) 940;
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Favorable Income Differential Per share
J2024S2022QN4A
Q. 31. The following is the parameter pertaining to 8% fully convertible (into equity shares)
debentures issued by DAZIN ltd. at ` 1,000:
Market Price of 8% Debenture (`) 1,200
Conversion ratio (Number of shares) 25
Straight value of 8% debentures (`) 1,000
Market price of equity shares on the date of conversion (`) 40
 Expected dividend per share (`) 1
Required:
Analyze and assess the following:
(1) Conversion value of debenture.
(2) Market conversion price.
(3) Conversion premium per share.
(4) Ratio of conversion premium.
(5) Premium over straight value of debenture.
(6) Favorable income differential per share.
Ans: (1) 1,000; (2) 48; (3) 8; (4) 20%; (5) 20%; (6) 2.2;
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