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Tutorial 1 Bond Valuation

This document provides a tutorial on basic bond valuation concepts. It includes 10 problems related to calculating bond prices, yields, and rates of return given information about the bond's coupon rate, par value, maturity date, and market prices as well as the investor's required rate of return. The problems cover calculating interest paid annually vs. semiannually, intrinsic bond values, yields to maturity, and determining whether a bond's price makes it a worthy investment.

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tai kianhong
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356 views

Tutorial 1 Bond Valuation

This document provides a tutorial on basic bond valuation concepts. It includes 10 problems related to calculating bond prices, yields, and rates of return given information about the bond's coupon rate, par value, maturity date, and market prices as well as the investor's required rate of return. The problems cover calculating interest paid annually vs. semiannually, intrinsic bond values, yields to maturity, and determining whether a bond's price makes it a worthy investment.

Uploaded by

tai kianhong
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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TUTORIAL 1

BASIC OF VALUATION AND BOND VALUATION

1. Two different banks offer the following rates for similar savings plans: Bank A pays 9%
interest compounded anually; Bank B pays 8% interest compounded quarterly. Which
plan would earn more for your investment if you intended to deposit RM5,000 for six
years?

2. You have won a Lucky Draw Contest and are offered the option of receiving either
RM50,000 today or RM12,500 at the end of the next five years. Ignoring taxes and
assuming a discount rate of 12%, which option would you prefer?

3. MG Corporation issued 20-year bonds five years ago with a par value of RM1,000. The
coupon rate is 14% and investors require a 10% return on these bonds.

a) How much interest does MG Corporation pay annually on each bond?

b) Will the bond sell at a discount, at par, or at a premium? Explain why?

c) Assume that coupon is paid annually, what is the intrinsic value of the bond?

d) What is the current yield on the bond?

e) Assume that coupon is paid semiannually, what is the intrinsic value of the bond?

4. Given below is information about three RM1,000 par value bonds, each of which pays
coupon semiannually. The required rate of return on each bond is 10%.

Bond Coupon Rate Maturity


(%) (Years)
A 6 10
B 10 15
C 14 20
a) Without performing any calculations, determine whether each bond should sell at a
discount, at its par value, or at a premium.
b) What is the intrinsic value of each bond?
c) How do your expectations compare with your computations?

5. MP Corporation has two RM1,000 par value bonds outstanding. Bond X matures in 5
years and bond Y matures in 15 years. Both bonds pay RM80 interest annually and
currently sell at their par value. Thus, the current required rate of return is 8%.
a) Which bond should show the greater price change in response to an increase in the
required rate of return?
b) What is the intrinsic value of each bond if the required rate is 9%?
c) Compare the price changes in the two bonds when the required rate of return changes
to 9%.

6. A RM1,000 par value bond matures in 18 years, carries a 12 percent coupon, and
currently is quoted at RM1,165. Coupon is paid annually.
a) Using a trial-and- error process, calculate the bond’s YTM to the nearest
whole percent.
b) What is the bond’s approximate yield to maturity?

7. Calculate the value of a bond that expects mature in in 12 years and has a RM 1,000 face
value. The coupon interest rate is 8 percent and the investors’ required rate of return is 12
percent.

8. Enterprise, Inc., bonds have a 9 percent coupon rate. The interest is paid semiannually
and the bonds mature in eight years. Their par value is RM1,000. If your required rate of
return is 8 percent, what is the value of the bond?

9. Exxon 20-year bonds pay 9 percent interest annually on a RM 1,000 par value. If you
buy the bonds at RM945, what is your expected rate of return?

10. National Steel 15-year, RM1,000 par value bonds pay 8 percent interest annually. The
market price of the bonds is RM1,085, and your required rate of return is 10 percent.
a) Compute the bond’s expected rate of return.
b) Determine the value of the bond to you, given your required rate of return.
c) Should you purchase the bond?

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