CA Final · Advanced Financial Management · Security Valuation
Sundaram Textiles has issued a bond of face value ₹1,000 carrying a 10% annual coupon, with exactly 3 years left to redemption at par. Investors presently require a yield to maturity of 12%. (PVAF at 12%, 3 years = 2.4018; PVF at 12%, year 3 = 0.7118.) What is the fair value of the bond?
The bond is worth about ₹952. Its coupons of ₹100 a year discounted at 12% for three years give ₹240.18, and the ₹1,000 redemption discounted gives ₹711.80. Because the required yield exceeds the coupon rate, the bond sells at a discount to face value.
- A₹952 (approx.)Correct
- B₹1,000
- C₹712 (approx.)
- D₹1,048 (approx.)
Explanation
Coupon = ₹100 a year. PV of coupons = 100 × 2.4018 = 240.18. PV of redemption = 1,000 × 0.7118 = 711.80. Value = ₹951.98, about ₹952. The ₹1,048 option reflects a sign error, treating the discount as a premium. ₹712 ignores the coupons.
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