FIN 630

Assignment Solution

1. Bond A: Bond A has a face value of Rs. 1000 with a coupon rate of 8%and the maturity
of 5 years. Coupon payments are made annually and the required rate of return of this
bond is 10% annually.

Face Value: Rs. 1000

Coupon Rate: 8%

Maturity: 5 years

Required rate of return; 10%

C FV
P= t+ t
(1+r ) (1+r )

C1 C2 C3 C4 C5 FV
= 1
+ 2
+ 3
+ 4
+ 5+ 5
(1+r ) (1+r ) (1+ r) (1+r ) ( 1+ r) (1+r )

80 80 80 80 80 1000
= 1
+ 2
+ 3
+ 4
+ 5+ 5
(1+.10) (1+.10) (1+.10) (1+ .10) (1+.10) (1+. 10)

80 80 80 80 80 1000
= 1
+ 2
+ 3
+ 4
+ 5+ 5
(1.10) (1.10) (1.10) (1.10) (1.10) (1. 10)

80 80 80 80 80 1000
P= + + + + +
1.10 1.21 1.331 1.4641 1.61051 1.61051

P = 72.73 + 66.12 + 60.11 + 54.64 + 49.67 + 620.92

P = Rs. 924.19

2. Bond B has a face value of Rs.1000 with a coupon rate of 8%and the maturity of 5 years.
Coupon payments are made annually and the required rate of return of this bond is 7%
annually.
Face Value: Rs. 1000

Coupon Rate: 8%

Maturity: 5 years

Required rate of return; 7%

C FV
P= t+ t
(1+r ) (1+r )

C1 C2 C3 C4 C5 FV
= 1
+ 2
+ 3
+ 4
+ 5+ 5
(1+r ) (1+r ) (1+ r) (1+r ) ( 1+ r) (1+r )

80 80 80 80 80 1000
= 1
+ 2
+ 3
+ 4
+ 5+ 5
(1+.07) (1+.07) (1+ .07) (1+.07) (1+.07) (1+.07)

80 80 80 80 80 1000
P= + + + + +
1.07 1.1449 1.2250 1.3107 1.4025 1.4025

P = 74.77 + 69.87 + 65.31 + 61.04 + 57.04 + 713.01

P = Rs. 1,041.04

3. What will be the effect of decrease in the required rate of return on the price/value of the
bond?

Ans: When the required rate of return is decreased then the present value increases and this is
good for bond holder.