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CA Final · Advanced Financial Management · Security Valuation

Narmada Power has issued a 2-year bond of face value ₹1,000 with an 8% coupon paid half-yearly. Redemption is at par. The market yield is 10% per annum, compounded half-yearly. (PVAF at 5%, 4 periods = 3.5460; PVF at 5%, 4 periods = 0.8227.) What is the value of the bond?

The bond is worth about ₹964.54. With half-yearly payments, the coupon is ₹40 and the discount rate is 5% over four periods. Coupons are worth ₹141.84 and the redemption is worth ₹822.70. Using annual compounding instead would give a slightly different value.

  1. A₹964.54 (approx.)Correct
  2. B₹965.29 (approx.)
  3. C₹809.81 (approx.)
  4. D₹1,106.38 (approx.)

Explanation

Half-yearly coupon = ₹40 and the half-yearly yield = 5% for 4 periods. PV of coupons = 40 × 3.5460 = 141.84; PV of redemption = 1,000 × 0.8227 = 822.70. Value ≈ ₹964.54. The ₹965.29 option wrongly uses annual coupons and annual 10% discounting. The ₹809.81 option applies 10% for 4 periods, and ₹1,106.38 uses a ₹80 coupon in the half-yearly annuity.

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