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

Bharat Auto Ltd has a 9% coupon bond of face value ₹1,000, paying interest annually and redeemable at par after 3 years. The required yield is 10%. Using discount factors at 10% of 0.9091, 0.8264 and 0.7513 for years 1 to 3, the approximate value of the bond is:

The bond is worth about ₹975. Discounting the three annual interest payments of ₹90 and the ₹1,000 redemption at 10% gives roughly ₹975, a discount to par because the coupon rate of 9% is lower than the required yield of 10%.

  1. A₹1,000.00
  2. B₹975.13Correct
  3. C₹1,024.87
  4. D₹975.10 less accrued interest of ₹90

Explanation

Interest ₹90 per year. PV of interest = 90 x (0.9091+0.8264+0.7513) = 90 x 2.4868 = ₹223.81. PV of principal = 1,000 x 0.7513 = ₹751.30. Total = ₹975.11, approximately ₹975.13 given rounding. Par value is wrong because coupon is below yield, so bond trades at a discount. ₹1,024.87 reverses the discount/premium direction.

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