FIXED INCOME MARKETS CASE STUDIES

1. Consider a bond of Reliance Ltd. with the following features:

Par value of Rs.100/-
Coupon Rate - 12%
Years of maturity = 5 years
Find out the value of the bond if the required rate of return is :
a) 12% b) 14%

2. A company has to make payment of Rs.2 million on 16th April, 2005. It has the surplus money today
i.e. 15th Jan, 2005. The company has decided to invest in certificate of deposit of a leading nationa-
lised bank @ 8% p.a.
What money is required to be invested now?

3. A five year bond with 8% coupon rate and maturity value of Rs.1,000/- is currently selling at Rs.925/-
. What is its yield of maturity?

5. A P.S.U. is proposing to sell a 8 years bond of Rs.1000/- at 10% coupon rate per annum. The bond
amount will be amortised equally over its life. If the investor has minimum required rate of return at
8%, what is bond’s present value?

6. A bond of Rs.10,000 bearing coupon rate of 12% and redeemable in 8 years at par is being traded at
Rs.9,600. Find out the YTM of the bond.

7. The following data are available for a bond

Face Value Rs. 1,000

Coupon Rate 16%
Years to Maturity 6
Redemption Value Rs. 1,000
Yield to maturity 17%

What is the current market price, duration and volatility of this bond? Calculate expected market price, if
increase in required yield is by 75 basis points.

8. M/s Transindia Ltd. is contemplating calling Rs. 3 crores of 30 year’s, Rs 1,000 bond issued 5 years ago
with a coupon interest rate of 14 percent. The bonds have a call price of Rs. 1,140 and had initially
collected proceeds of Rs. 2.91 crores due to a discount of Rs. 30 per bond. The initial floating cost was Rs.
3,60,000. the Company intends to sell Rs. 3 crores of 12 percent coupon rate, 25 years bonds to raise
funds for retiring the old bonds. It proposes to sell the new bonds at their par value of Rs. 1,000. The
estimated floatation cost is Rs. 4,00,000. The company is paying 40% tax and its after cost of debt is 8
percent. As the new bonds must first be sold and their proceeds, then used to retire old bonds, the
company expects a two months period of overlapping interest during which interest must be paid on both
the old and new bonds. What is the feasibility of refunding bond?

9. A company is presently working with an EBIT of Rs. 45 Lakh. It’s present borrowing are :
Rs. in Lakh
12% Term Loan 150
Working Capital : Borrowing from Bank @ 15% 100
Public Deposit @ 11% 45

The sales of the company is growing and to support this the company proposes to obtain additional borrowing
of Rs. 50 Lakhs expected to cost 16%. The increase in EBIT is expected to be 16%.
Calculate the change in Interest Coverage Ratio after additional borrowing and commitment.

(1) Dr. CA. Harshawardhan Patil

10. M/s Agfa Industries is planning to issue a debenture series on the following terms:
Face value Rs. 100
Term of maturity 10 years
Yearly coupon rate

Years
1 to 4 9%
5 to 8 10%
9 to 10 14%

The current market rate on similar debentures is 15 percent per annum. The Company proposes to
price the issue in such a manner that it can yield 16 percent compound rate of return to the investors. The
Company also proposes to redeem the debentures at 5 per cent premium on maturity. Determine the
issue price of the debentures.

11. There is a 9% 5-year bond issue in the market. The issue price is Rs. 90 and the redemption price
Rs. 105. For an investor with marginal income tax rate of 30% and capital gains tax rate of 10%
(assuming no indexation), what is the post-tax yield to maturity?

12. The 6-months forward price of a security is Rs. 208.18. The borrowing rate is 8% per annum payable with
monthly rests. What should be the spot price?

13. A firm has a sales of Rs. 6 crores. Variable cost Rs. 3.5 crores and Fixed cost of Rs. 0.65 crores. The firm
has debt and equity resources worth of Rs. 7 crores and 10 crores respectively. With the data given show:
(i) The firm’s ROI
(ii) EBIT if sales decline to Rs. 4 crores
(iii) If the industry’s assets turnover is 4 times, does the firm has high or low asset turnover? The cost of
debt is 10%, Ignore Taxation.

15. MP Ltd. issued a new series of bonds on January 1, 2000. The bonds were sold at par (Rs. 1,000),
having a coupon rate 10% p.a and mature on 31st December, 2015. Coupon payments are made
semiannually on June 30th and december 31st each year. Assume that you purchased an outstanding
MP Ltd. Bond on 1st March, 2008 when the going interest rate was 12%.
Required:
(i) What was the YTM of MP Ltd. Bonds as on January 1, 2000?
(ii) What amount you should pay to complete the transaction? Of that amount how much should be
accured interest and how much would represent bonds basic value.

The following is the Yield structure of AAA rated debenture:

Period Yield (%)
3 months 8.5%
6 months 9.25%
1 year 10.50%
2 years 11.25%
3 years and above 12.00%
(i) Based on the expectation theory calculate the implicit one-year forward rates in year 2 and year 3.
(ii) If the interest yield increases by 50 basis points, what will be the percentage change in the price
of the bond having a maturity of 5 years? Assume that the bond is fairly priced at the moment at
Rs.1,000.

(2) Dr. CA. Harshawardhan Patil

 XL Ispat Ltd. has made an issue of 14 percent non-convertible debentures on January 1, 2007. These
debentures have a face value of Rs. 100 and is currently traded in the market at a price of Rs. 90.
Interest on these NCDs will be paid through post-dated cheques dated June 30 and December 31.
Interest payments for the first 3 years will be paid in advance through post-dated cheques while for the
last 2 years post-dated cheques will be issued at the third year. The bond is redeemable at par on
December 31, 2011 at the end of 5 years.
Required:
(i) Estimate the current yield at the YTM of the bond.
(ii) Calculate the duration of the NCD.
(iii) Assuming that intermediate coupon payments are, not available for reinvestment calculate the
realised yield on the NCD.

Based on the credit rating of bonds, Mr. Z has decided to apply the following discount rates for valuing
bonds:
Credit Rating Discount Rate
AAA 364 day T bill rate + 3% spread
AA AAA + 2% spread
A AAA + 3% spread
He is considering to invest in AA rated. Rs. 1,000 face value bond currently selling at Rs. 1,025.86. The
bond has five years to maturity and the coupon rate on the bond is 15% p.a. payable annually. The
next interest payment is due one year from today and the bond is redeemable at par. (Assume the 364
day T-bill rate to be 9%).
You are required to calculate the intrinsic value of the bond for Mr. Z. Should he invest in the bond? Also
calculate the current yield and the Yield To Maturity (YTM) of the bond.

(3) Dr. CA. Harshawardhan Patil