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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 matures in 3 years at par. The market yield to maturity is 12%. Using discount factors at 12% for years 1, 2 and 3 of 0.8929, 0.7972 and 0.7118, what is the approximate bond price?

The bond price is about Rs 951.97, a discount to par. Coupons of Rs 100 discounted at 12 percent are worth about Rs 240.19, and the Rs 1,000 principal is worth about Rs 711.80, since the coupon rate is below the market yield.

  1. ARs 951.97Correct
  2. BRs 1,000.00
  3. CRs 1,048.03
  4. DRs 893.00

Explanation

PV of coupons = 100x(0.8929+0.7972+0.7118)=100x2.4019=240.19. PV of principal = 1,000x0.7118=711.80. Price = 951.99, approximately Rs 951.97 to rounding of factors. Rs 1,048.03 reverses the premium/discount; a bond with coupon below yield sells at a discount.

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