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Course Title: Financial Management

Term: III (PGDM RM)


Prepared By : Dr Surya Dev

Assignment 2
Instructions
Solve the problems as instructed.

Submission Deadline
The assignment has to be submitted within two days of receipt of the same in hard copy.

Credit points
The credit points of this assignment would be declared later.

Problems on Bonds
1. Calculate the value of the bond with a face value of Rs 100, a coupon rate of 10%
maturing after 5 years. Assume the required rate of return is 15%.
2. Par value of a bond = Rs 100. Maturity = 10 yrs Coupon rate = 14 percent paid semiannually. Required rate of return = 12%. Calculate the value of the bond.
3. The market price of a Rs 1000 par value bond carrying a coupon rate of 14 percent
and maturing after 5 years is Rs 1050. What is the yield to maturity on this bond?
What is the approximate YTM? What will be the realized YTM if the reinvestment
rate is 12 percent?
4. Suppose you buy a one-year government bond that has a maturity value of Rs 1,000.
The market interest rate is 8 percent. (a) How much will you pay for the bond? (b) If
you purchased the bond for Rs 904.98, what interest rate will you earn on your
investment?
5. On 31 March 2003, hind tobacco company issued Rs 1,000 face value bonds due 31st
march 2013. The company will not pay interest on the bond until March 31, 2008.
The half yearly interest is payable from 31st dec 2008; the annual interest rate will be
12 percent. The bonds would be redeemed at 5 percent premium on maturity. If the
required rate of return is 14% what is the value of the bond?
6. Current market price of a bond = Rs 102. The coupon rate is 15%. Maturity = 20
years. The bond is callable in 5 years at Rs 111. The general expectation is that the
interest rates will show a downward trend in the near future. Compute (a) YTM (b)
YTC (c) Of these two which is better measure and why.
7.

A bond with a term to maturity 5 years has a face value of Rs 1000. If the coupon
rate is 8% and YTM is 12%. Calculate P0, P1, P2, P3, P4 and P5.

8.

The market price of a Rs 1000 par value bond carrying a coupon rate of 14 percent
and maturing after 5 years is Rs 1050. What is the yield to maturity on this bond?
What is the approximate YTM? What will be the realized YTM if the reinvestment
rate is 12 percent?

9.

Consider a bond with the following characteristics:


Coupon = Rs 80
Par value = Rs 1000
r = 0.1, the discount rate, the going market interest rate on similar securities
n = exactly three years the time to maturity under two different market
conditions:
a) Annual coupon payments, Rs 80 is received at the end of each year.
b) Semi-annual coupon payments, Rs 40 is received every six months.

i) Calculate the price of the bond in both semi-annual and annual basis
ii) Calculate the duration on a semi-annual basis
10.

Anand owns Rs 1000 face value bond with five years to maturity. The bond has
an annual coupon of Rs 75. the bond is currently priced at Rs 970. Given an
appropriate discount rate of 10 percent, should Anand hold or sell his bond?

11.

A bond has 4 years to maturity. The bond has a coupon rate of 9 percent and is
priced Rs 100 in the market. Calculate the duration of the bond? What will be the
percentage change in the price of the bond if the interest rates rises to 10 percent?