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

A Rs 1,000 face value bond of Kaveri Infra pays 9% annual coupon and matures in 3 years at par. The yield to maturity required by investors is 12%. Using the present value factors at 12% for years 1, 2 and 3 of 0.893, 0.797 and 0.712 respectively, what is the approximate value of the bond?

The bond is worth about Rs 928, roughly Rs 927.90. The Rs 90 annual coupons discounted at 12% give about Rs 216, and the Rs 1,000 redemption discounted three years gives Rs 712. Because the coupon is below the required yield, the bond sells at a discount.

  1. ARs 927.90Correct
  2. BRs 1,000.00
  3. CRs 892.80
  4. DRs 927.90 plus accrued coupon of Rs 90

Explanation

Coupon = Rs 90. PV of coupons = 90 x (0.893+0.797+0.712) = 90 x 2.402 = 216.18. PV of principal = 1,000 x 0.712 = 712. Total = Rs 928.18 (about Rs 927.90 with rounding in the factors). Rs 1,000 is wrong because the coupon rate is below the required yield, so the bond must trade at a discount.

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