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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 Power Ltd carries a 10% annual coupon and matures in 3 years at par. The yield to maturity required by investors is 12%. Given the PV factors at 12% for years 1, 2 and 3 as 0.8929, 0.7972 and 0.7118, what is the approximate value of the bond?

The bond is worth about Rs 952. Discount the three Rs 100 coupons at 12% (about Rs 240.19) and the Rs 1,000 redemption (about Rs 711.80). Since the coupon of 10% is below the 12% required yield, the bond trades at a discount to face value.

  1. ARs 951.98Correct
  2. BRs 1,000.00
  3. CRs 1,048.02
  4. DRs 928.00

Explanation

PV of coupons = 100 x (0.8929 + 0.7972 + 0.7118) = 100 x 2.4019 = Rs 240.19. PV of principal = 1,000 x 0.7118 = Rs 711.80. Total = Rs 951.99, approximately Rs 951.98 given rounding. The bond sells at a discount because the coupon is below the required yield. Rs 1,048.02 wrongly reverses the discount into a premium.

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