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CMA Intermediate · Financial Management and Business Data Analytics · Capital Market

A debenture of face value Rs 1,000 carries a coupon of 9% per annum paid annually and is redeemable at par after 3 years. An investor requires a yield of 10%. Given PV factors at 10% for years 1, 2, 3 of 0.909, 0.826, 0.751 (sum 2.486), what is the approximate value of the debenture?

The debenture is worth about Rs 975. Discount the Rs 90 annual interest at 10% using the annuity factor 2.486 to get about Rs 223.7, add the present value of Rs 1,000 redemption at 0.751, which is Rs 751. The total is below par because coupon is under required yield.

  1. ARs 975.10Correct
  2. BRs 1,000.00
  3. CRs 1,024.90
  4. DRs 913.50

Explanation

Annual interest = 90. PV of interest = 90 x 2.486 = 223.74. PV of redemption = 1,000 x 0.751 = 751. Value = 974.74, approximately Rs 975 (rounded option Rs 975.10 is the closest, with minor factor rounding). Rs 1,000 wrongly assumes value equals par, though the coupon is below the required yield.

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