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# Session 8: Bond Valuation 1. Find the price at which a 3-year bond with face value Rs.

100 and a coupon of 8% paid semi-annually should be quoted if the yield curve is flat at 6%. What will be the price if the yield curve rises to 10%? 2. If a 3-year bond with a face value of Rs.100 and a semi-annual coupon of 8% p.a. is quoted at Rs.105.41, what is the yield to maturity for an investor purchasing the bond at this price? 3. What is the current yield for bond in example no.1 at a price of Rs.105.41 and Rs.94.92? 4. An 8% coupon 30-year maturity bond is currently traded at a yield to maturity of 6.8%. Coupon is paid semi-annually. If the bond is callable in 10 years at a price of Rs.110 what is the yield-to-call? If the bond is callable in 10 years at a price of Rs.105 what is the yield-to-call? 5. Bonds of ABC corp have a par value of Rs.1000, mature in 5 years, pay a 7% coupon semi-annually and are currently traded at Rs.960. What is the bonds yield to maturity at the current price? Calculate the realized compound yield for an investor with a 3-year holding period and a reinvestment rate of 6% over the holding period. Assume that at the end of the holding period the bonds with a remaining term of 2 years will trade at a yield of 7%.
6. A bond dealer with Royal Bank is analyzing two bonds with the following

characteristics:

Bond A

BOND B

Term to Maturity 30 years 20 years Coupon 7% annual 6.5% annual Current Price Rs.86.74 Rs.87.95 The bond research analyst of the bank has forecast that in 5 years, 25 year maturity bonds will trade at yield to maturity of 8% and 15-year maturity bonds will trade at yields of 7.5%. The analyst also believes that coupons can be re-invested at a rate of 6%. Assuming that the investment horizon of the bond dealer is 5 years, which bond will offer the higher expected rate of return over the investment horizon?
7. WockHealth Ltd is in severe financial distress and is trying to restructure its debt.

The Companys 10-year bond paying an annual coupon of 14% is currently trading at Rs.90. In the course of re-negotiations the Companys lenders have agreed to a reduction in the annual coupon but no change in the principal amount so that they receive a yield to maturity of 8.53% at the current price of Rs.90. How much is the reduction in coupon that has been agreed to by the lenders?

8. A large company issued fixed rate notes and floating rate notes 5 years ago on the

## terms given below.

9% Coupon Notes Rs.250 million 20 yrs Rs.93 9% Fixed cpn Floating Rate Note Rs.280 million 10 yrs Rs.98 8% Every year 1-year T-Bill --rate+2% 10 years after 10 years after issue issue Rs.106 Rs.102.5 None None 9.90% ---

Issue size Original maturity Current price Current cpn Coupon adjusts Coupon reset rule

Callable Call price Sinking Fund Yield to maturity Price range since issued Rs.85-Rs.112 Rs.97-Rs.102 a. Why is the price range greater for the 9% coupon bond than for the floating

rate note?
b. What factors could explain why the floating rate note is not always sold at

par?
c. Why is the call price for the floating rate note not of great importance to the

investors?
d. Is the probability of call for the fixed rate note high or low? e. If the firm were to issue a fixed rate note with a 15-year maturity what coupon

## rate would it need to offer to issue the bond at par value?

f. Why is there no entry for the yield to maturity of the floating rate note?

9. On May 30, 2008 a fund manager is considering investing in one of the following bonds.
Issuer Maturity Coupon Current Price Call feature ABC Ltd PQR Ltd 30-May-18 30-May-18 6% 6.20% 100 100 Non-callable Callable

Call Price

---

Rs.102

a. Suppose market interest rates decline by 100 basis points, what will be the effect on the price of each bond? Assume coupon is semi-annual. b. Should the PQR Ltd bond be preferred over the ABC Ltd bond when interest rates are expected to rise or fall? 10. A newly issued bond has a maturity of 10 years and a coupon of 9%. Coupon is paid annually. The bond is currently selling at par. You are required to :
a. Compute the duration of the bond b. Find the actual price of the bond assuming that its yield to maturity

immediately i NCREASES TO 10% WITH MATURITY STILL 10 YEARS c. WHAT PRICE CAN BE PREDICTED BY THE DURATION RULE? WHAT IS PERCENTAGE ERROR OF THAT RULE ? d. IF CURRENTLY THE BOND S CONVEXITY IS 56.50, WHAT PRICE CAN BE PREDICTED BY THE DURATION -WITH- CONVEXITY RULE ? WHAT IS THE PERCENTAGE ERROR OF THAT RULE ?

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