Financial

Management
Strategy-
MBA-731

WORK-
UNITY UNIVERSITY
SHEET TWO
 Unity university

Financial management strategy

Work sheet-three-on Valuation of Bond

Part one: say true if the statement correct or false if it is wrong and provide due justification for your
answer

1. Treasury bonds and Municipal bonds are default free

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2. Treasury bond prices decline when interest rates rise, so they are not free of all risks.
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3. corporate bonds have different levels of default risk, depending on the issuing company’s
characteristics and on the terms of the specific bond
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4. Interest earned on most municipal bonds is exempt from federal taxes and also from state taxes if
the holder is a resident of the issuing state.
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5. bonds are often not callable until several years (generally 5 to 10) after they were issued
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6. The risk that a decline in interest rates will lead to a decline in income from a bond portfolio-this is
known as reinvestment rate risk
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7. This risk of a decline in bond values due to rising interest rates is called i–reinvestment rate risk
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8. Under a mortgage bond, the corporation pledges certain assets as security for the bond.

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9. A debenture is an unsecured bond, and as such it provides no lien against specific property as
security for the obligation
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10. Subordinated debt is a loan (or security) that ranks below other loans (or securities) with regard to
claims on assets or earnings.

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PART TWO: MATCH ITEMS ON B TO A

a. B.
1. Call provision A. Represents the amount of money the firm borrows and
2. Par value promises to repay on the maturity date.
3. Coupon payment B. Payment, which is fixed at the time the bond is issued,
4. Zero coupon Bonds remains in force during the life of the bond
5. Original Issue discount rate C. Fixed number of dollar of interest paid per par value.
6. Maturate Date D. Coupon payment vary over time
7. Original maturity E. Bonds pay no coupons at all, but are offered at a substantial
8. Coupon interest rate discount below their par values and hence provide capital
9. Floating rate bonds appreciation rather than interest income
10. Sinking funds F. Date on which the par value must be repaid
G. Bond originally offered at a price significantly below its par
value.
H. A bond contract that gives the issuer the right to redeem the
bonds under specified terms prior to the normal maturity date
I. The maturity at the time the bond is issued
J. A fund established by an economic entity by setting aside
revenue over a period of time to fund a future capital
expenses or repayment of a long term debt

Work out and short answer questions

1. What is the value of bond with Five year corporate bond pay coupons at 10% rate, market rate
(discount rate) (required rate of return) is 8%. The par value of the bond is 1000. Indicate
whether a bond is sold at par, discount or premium.

a. If kd remained constant at 8% percent, what would the value of the bond be one year
after it was issued? (Market rate=coupon rate=discount rate)

b. What is the situation when coupon rate change from 8 to 6 after first year.

c. Had interest rates risen from 8 to 10 percent during the first year after issue rather than
fallen from 8 to 6 percent? What is the value of the bond and the discount you have on
par value?

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 2. What makes a bond junk or strong investment bond

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 3. Clearly explain bond risks

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