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CA Final · Advanced Financial Management · Security Valuation

Bharat Infra Ltd has issued bonds of face value ₹1,000 carrying 10% annual coupon, with exactly 3 years left to redemption at par. Investors in similar-risk bonds require a yield to maturity of 12%. Using PVAF(12%,3) = 2.4018 and PVF(12%,3) = 0.7118, what is the intrinsic value of one bond?

The bond is worth about ₹952. Its coupons of ₹100 a year and the ₹1,000 redemption are discounted at the 12% required yield. Because the required yield exceeds the 10% coupon rate, the bond must trade at a discount to its face value.

  1. A₹952 (approximately)Correct
  2. B₹1,000
  3. C₹1,052 (approximately)
  4. D₹712 (approximately)

Explanation

Value = coupon × PVAF + redemption × PVF = 100 × 2.4018 + 1,000 × 0.7118 = 240.18 + 711.80 = ₹951.98, about ₹952. The ₹1,000 option wrongly assumes par because it ignores that the required yield exceeds the coupon. ₹1,052 reflects discounting at a rate below the coupon rate. ₹712 counts only the PV of the principal and omits coupons.

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