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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 Sundaram Infra pays 10% annual coupon and matures in 2 years at par. The yield to maturity is 12%. What is the approximate present value of the bond? (Discount factors at 12%: year 1 = 0.8929, year 2 = 0.7972)

The bond's present value is about Rs 966.20. Discounting coupons of Rs 100 in year one and Rs 1,100 in year two at 12% gives 89.29 plus 876.92. Because the yield exceeds the 10% coupon rate, the bond must trade at a discount to its Rs 1,000 face value.

  1. ARs 1,000.00
  2. BRs 966.20Correct
  3. CRs 966.20 plus accrued interest, i.e. Rs 1,066.20
  4. DRs 1,033.80

Explanation

Coupon = Rs 100. PV = 100 x 0.8929 + 1,100 x 0.7972 = 89.29 + 876.92 = Rs 966.21, about Rs 966.20. Since YTM exceeds coupon rate, the bond sells at a discount, so Rs 1,033.80 (premium) is wrong. Par value is also wrong for the same reason.

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