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Bond Valuation and Price Analysis

The document discusses the pricing of two bonds, Bond A and Bond B. [1] Bond A has a face value of Rs. 1000, coupon rate of 8%, maturity of 5 years, and required rate of return of 10%. Its calculated price is Rs. 924.19. [2] Bond B also has a face value of Rs. 1000 and coupon rate of 8%, but its maturity is 5 years and required rate of return is 7%. Its calculated price is Rs. 1,041.04. [3] A decrease in the required rate of return would increase the present value and price of the bond, benefiting the bond holder.

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Muhammad Arbaz
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25 views2 pages

Bond Valuation and Price Analysis

The document discusses the pricing of two bonds, Bond A and Bond B. [1] Bond A has a face value of Rs. 1000, coupon rate of 8%, maturity of 5 years, and required rate of return of 10%. Its calculated price is Rs. 924.19. [2] Bond B also has a face value of Rs. 1000 and coupon rate of 8%, but its maturity is 5 years and required rate of return is 7%. Its calculated price is Rs. 1,041.04. [3] A decrease in the required rate of return would increase the present value and price of the bond, benefiting the bond holder.

Uploaded by

Muhammad Arbaz
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

FIN 630

Assignment Solution

1. Bond A: Bond A has a face value of Rs. 1000 with a coupon rate of 8%and the maturity
of 5 years. Coupon payments are made annually and the required rate of return of this
bond is 10% annually.

Face Value: Rs. 1000

Coupon Rate: 8%

Maturity: 5 years

Required rate of return; 10%

C FV
P= t+ t
(1+r ) (1+r )

C1 C2 C3 C4 C5 FV
= 1
+ 2
+ 3
+ 4
+ 5+ 5
(1+r ) (1+r ) (1+ r) (1+r ) ( 1+ r) (1+r )

80 80 80 80 80 1000
= 1
+ 2
+ 3
+ 4
+ 5+ 5
(1+.10) (1+.10) (1+.10) (1+ .10) (1+.10) (1+. 10)

80 80 80 80 80 1000
= 1
+ 2
+ 3
+ 4
+ 5+ 5
(1.10) (1.10) (1.10) (1.10) (1.10) (1. 10)

80 80 80 80 80 1000
P= + + + + +
1.10 1.21 1.331 1.4641 1.61051 1.61051

P = 72.73 + 66.12 + 60.11 + 54.64 + 49.67 + 620.92

P = Rs. 924.19

2. Bond B has a face value of Rs.1000 with a coupon rate of 8%and the maturity of 5 years.
Coupon payments are made annually and the required rate of return of this bond is 7%
annually.
Face Value: Rs. 1000

Coupon Rate: 8%

Maturity: 5 years

Required rate of return; 7%

C FV
P= t+ t
(1+r ) (1+r )

C1 C2 C3 C4 C5 FV
= 1
+ 2
+ 3
+ 4
+ 5+ 5
(1+r ) (1+r ) (1+ r) (1+r ) ( 1+ r) (1+r )

80 80 80 80 80 1000
= 1
+ 2
+ 3
+ 4
+ 5+ 5
(1+.07) (1+.07) (1+ .07) (1+.07) (1+.07) (1+.07)

80 80 80 80 80 1000
P= + + + + +
1.07 1.1449 1.2250 1.3107 1.4025 1.4025

P = 74.77 + 69.87 + 65.31 + 61.04 + 57.04 + 713.01

P = Rs. 1,041.04

3. What will be the effect of decrease in the required rate of return on the price/value of the
bond?

Ans: When the required rate of return is decreased then the present value increases and this is
good for bond holder.

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