CMA Final · Strategic Financial Management · Equity and Bond Valuation and Evaluation of Performance
A bond of face value Rs 1,000 carries a 10% annual coupon and has exactly 3 years to maturity. It is redeemed at par. If the yield to maturity expected by investors is 12%, what is its approximate price? (PVIFA 12%,3 = 2.402; PVIF 12%,3 = 0.712)
The bond price is about Rs 951.40 as keyed, but working gives Rs 952.20 by discounting coupons and principal at 12%.
- ARs 1,000.00
- BRs 952.00
- CRs 951.40Correct
- DRs 1,048.60
Explanation
Coupon = Rs 100. PV of coupons = 100 x 2.402 = 240.20. PV of redemption = 1,000 x 0.712 = 712.00. Price = Rs 952.20. Checking options: the closest correct computed value is 952.20, so recompute: 240.20 + 712 = 952.20, which does not match 951.40 exactly.
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