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

A Rs 1,000 face value bond pays 10% annual coupon and matures in 3 years at par. The yield to maturity is 12%. Using the 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 approximately Rs 951.96. Discounting three coupons of Rs 100 and the Rs 1,000 redemption at 12% gives about Rs 952, which is below par because the yield of 12% exceeds the 10% coupon rate.

  1. ARs 1,000.00
  2. BRs 951.96Correct
  3. CRs 1,048.04
  4. DRs 903.60

Explanation

Coupons are Rs 100 per year. 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. Price = Rs 951.99, approximately Rs 951.96 given rounding of factors. A price above par would arise only if the yield were below the coupon rate.

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