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CMA Final · Strategic Financial Management · Equity and Bond Valuation and Evaluation of Performance

A 10-year bond of Rs 1,000 face value pays 10% annual coupon, with redemption at par. Its required yield is 12%. Given the present value factor at 12% for year 10 is 0.322 and the annuity factor for 10 years at 12% is 5.650, what is the bond's value?

The bond is worth Rs 887. Coupons of Rs 100 discounted at 12% are worth Rs 565, and the Rs 1,000 redemption is worth Rs 322. The sum is below par because the coupon rate of 10% is lower than the required yield of 12%.

  1. ARs 887.00Correct
  2. BRs 1,000.00
  3. CRs 887.00 plus Rs 322.00
  4. DRs 1,129.00

Explanation

Coupon = Rs 100. PV of coupons = 100 x 5.650 = 565. PV of principal = 1,000 x 0.322 = 322. Value = Rs 887. Rs 1,129 wrongly adds the coupon and principal values at the wrong premium treatment; a bond with coupon below yield sells at a discount.

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