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Chapter 4:BOND (Valuation of bond) -FIN358
Investment management (FIN358)
Universiti Teknologi MARA
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CHAPTER 4A: BOND
(BOND VALUATION)
1. Intrinsic Value (Price) of a bond / Value of the bond
Vb = [ { (CR/m) x PV } (PVIFA k/m ,nXm) ] + PV ( PVIF k/m, nXm )
2. Current yield
CY
3. Yield to maturity
YTM
4. Yield to call
YTC
NOTES
1. Decision to BUY when:
i. Bond Price > Market Price ii. YTM (bond’s return) > k (required rate of return)
2. Relationship between required rate of return, coupon interest rate and bond price. i. k > CR → bond will sell at Discount ii. k = CR → bond will sell at Par iii. k < CR → bond will sell at Premium
(CR X Par Value)
m = How many times the coupon payment is paid
EXERCISES
- Mr. Andy, an investment agent has approached Mr. Zola to invest in bond. The following information was presented to Mr. Zola regarding two bonds.
Baru-Baru Bond Lama-Lama Bond
Year of Maturity 2030 2028
Coupon rate 6 percent 12 percent
Selling price RM950 RM1,
Both bonds were issued in year 2016. If the required rate of return is 10 percent, calculate the value of each bond.
Mrs Janam has decided to invest RM980 in 15 percent semi-annual, 5 years bonds. What is the yield to maturity of the bond?
Shahrul has decided to invest RM850 in 12% semi-annual coupon for 5 years bond. Determine the yield to maturity.
A bond with coupon rate of 12 percent is selling for RM950. The issuer may call back the bond after 6 years at RM1,200. Determine the yield to call on this bond.
A 15-year bond with interest of RM30 is paid semi-annually. The bond is selling at RM888. You are required to determine:
i. The coupon rate ii. The current yield
- A 9 percent, 25-year bond issued 6 years ago is currently priced in the market at RM980. The issuer expects to call back the bond after 10 years from the issued date at RM1,100. Calculate the following:
i. Yield to maturity ii. Yield to call
LACE Corp. had just issued a 14 percent, 20-year bond that pays semi-annually coupon. If the prevailing market interest rate is at 12 percent, find the value of the bond.
Assume that an investor is looking at the information of these two (2) bonds:
Bond X Bond Y Coupon rate 10% 8% Term of interest Annually Semiannually
Maturity 20 years 10 years
Market Price RM950 RM Call Date 5 years before maturity
Call Price At premium of 10-percent
i. Calculate the yield to maturity for both bonds. ii. Identify which bond has the higher current yield.
Polar Bear Corp. issued bonds with a RM1, 000 face value which makes coupon payments of RM25 for every 3 months. Compute the coupon rate.
Gambir Corp. is planning to invest in bonds. At present, there are two bonds being offered in the market. The first is a 8 percent 10-year bond issued by Alamanda Bhd and the second is a 10 percent; 12-year bond issued by Belanda Bhd. In a year, Gambir Corp. will receive interest once from Alamanda and twice from Belanda Bhd. Compute the value of each bond if the expected return is 20 percent.
A zero coupon bond is currently selling at 70 percent discount. It was issued four years ago and will mature in another six years’ time. Calculate the yield to maturity of this bond.
A 14 percent semiannually, 12 years bond of Cheju Company is now selling at premium of 70 percent. Calculate:
i. Current yield ii. Despite of that the issuer may expect to call back the bond 4 years before maturity at RM1, 200. Calculate the Yield to Call.
A 10-year, 10 percent coupon bond with a par value of RM1, 000 will mature in another 5 years. It is currently selling at RM1, 020. The issuer expects to call back the bond after 8 years from the bond issued date at RM1, 100. Determine the following: i. Yield to maturity ii. Yield to call
Consider a 15 year Bond XYZ pays a 10% coupon rate of interest paid semiannually, has a face value of RM1,000. The bond was issued 5 years ago. It is currently selling at RM900. Calculate the yield to maturity on this bond.
Find the yield to call on a semiannually coupon bond with a face value of RM1,000, a 10% coupon rate, 15 years remaining until maturity given that the bond price is RM1,175 and it can be called 5 years from now at a call price of RM1,100.
A bond with a face value of RM1,000 and coupon rate of 10% is selling for RM950. It was issue three years ago and will mature in another 4 years’ time. Calculate the yield to maturity on this bond.
Galaksi Berhad is interested to invest in bond A. Bond A pays 10 percent coupon annually and matures in 6 years.
i. Determine the value of the bond if current market yield is 8 percent. ii. Assuming Bond A is currently selling at RM990, justify whether they should purchase the bond.
Bond MGS pays a 7% annual coupon. The bond pays interest annually. There are 9 years remaining until maturity. What is the current yield on the bond assuming that the required return on the bond is 10%?
A 20-year bond with a par value of RM1,000 has a 9% annual coupon. The bond currently sells for RM925. If the bond’s yield to maturity remains at its current rate, what will be the price if the bond issued 5 years ago?
Find the yield to call on a semi-annual coupon bond with a face value of RM1,000, a 12% coupon rate, 20 years remaining until maturity given that the bond price is RM1,175, and it can be called 7 years from now at a call price of RM1,100.
Borneo Pearl Berhad has a RM100,000 nominal value bond, with coupon rate of 4%, purchased at RM95,000 has five years remaining to maturity. Calculate the approximate yield to maturity.
A semi-annual, 10 percent, 12 year bond which issued 5 years ago is now selling at 6 percent premium. The bond is callable on its 10th year at a call price of RM1500. Determine:
i. Selling price of the bond ii. Yield to call
Medina Nur Inc. has a twenty year bond at market price of RM115,000 with coupon rate 9% on nominal value of RM100,000 and 5 years remaining to first call. The call price is RM112,000. Find the approximate yield to call.
What is the value of a 8 percent, 20 year bond issued 8 years ago with par value of RM1,000 paying semiannually coupon payments. The market interest rate is 10 percent per annum. If the bond’s selling price is RM900, should you buy the bond? Why?
A 10 percent coupon bond with a par value of RM1,000 matures in 13 years. It is currently sell at RM920. Despite of that, the issuer may expect to call back the bond after 8 years at RM1,100. Determine the following: i. Yield to maturity (YTM) ii. Current yield (CY) iii. Yield to call (YTC) iv. Would you pay RM920 for the bond if the required rate of return for securities in the same risk class was 12 percent which the interest paid annually?
Nisrina Berhad is interested to invest in bonds. Currently its Financial Manager is evaluating Bond A and Bond B. Bond A pays 9% coupon semiannually and matures in 12 years. Bond B pays 7% coupon annually having a maturity period of 13 years. i. Determine the value of each bond if the current market yield for both bonds is 8%. ii. Assume Bond A is currently selling at RM990 while Bond B is selling at RM950. Which bond would Nisrina Berhad buy? Why?
A 9%, 25 year bond issued 6 years ago is currently priced in the market at RM980. i. Determine the bond’s yield to maturity (YTM) ii. If your required rate of return is 8%, will you buy this bond? Why?
Given the following information of Bond MK Land and Bond YTL Land:
Issuing company Bond MK Land Bond YTL Land Coupon rate 14 percent 12 percent Term of coupon payment Annually Semi annually Maturity (years) 20 15 Market price RM1,400 RM1,
For each bond, calculate: i. Coupon payment for each interest payment period. ii. Current yield for each bond iii. Value of bond if your required rate of return is 8 percent. Which bond would you invest to earn better return? Justify your answer.
Ahmad bought 20 years bond, 5 years ago. The bond has 8% coupon payment and RM960 in market price. Calculate the yield to maturity for the bond.
A 10 year bond pays interest of RM35 semiannually, has a par value of RM1,000 and is selling for RM737. You are required to determine: i. Coupon rate ii. Current yield
A bond with face value of RM1,000 and a coupon rate of 10% is selling for RM900. The issuer may call back the bonds after 7 years at RM1,100. Determine the yield to call on this bond.
Chapter 4:BOND (Valuation of bond) -FIN358
Course: Investment management (FIN358)
University: Universiti Teknologi MARA
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