Questions on Valuation of Securities

Q.1 When a bond is purchased at a price other than the face value, the coupon interest rate is
different from the YTM of the Bond. TRUE or FALSE. Explain briefly.

Q.2 When will a bond sell for more than its par value?

Q.3 Why do you think that bond values approach their Par Values at Maturity? (GOOGLE)

Q.4 ABC Corporation bonds offer an annual coupon interest rate of 10.95%. Their Maturity is 31 st
Dec, 2030. If today is 1st Jan, 2021, than what is the current value of the bond if the required rate of
return on similar bonds is 9%? (Hint: Calculate value based on remaining life to the bond)

Q.5 The bonds of ABC corporation are available in the market at Rs 1135/-. The bonds are offering a
coupon interest rate of 10.95% and will mature on Dec 31 st, 2030. What is the Yield to Maturity that you
will achieve if today is 1st Jan, 2020 and you purchase the bond at the stated market rate?

Q.6 ABC corporation is offering bonds with a face value of Rs 1000/-. The bonds will mature in 10
years from today. The annual coupon interest rate is 12 percent with payments to be made annually.
You have just purchased one such bond at the current market price of Rs 1265/-.

a) Will the yield to maturity of this bond be greater than or less than the coupon interest
rate? Answer this without any calculations

b) To the nearest whole percent, what is the yield to maturity of your bond?

c) What would the yield to maturity have to be to make the market price of the bond
equal to the face value? No calculations required

Q.7 ABC Corporations preferred stock will soon be selling in the market. They will offer a
guaranteed annual dividend of Rs 10/- per share. Your research tells you that similar preferred stock in
the market have an expected rate of return of 12%. At what price should you purchase the share?

Q.8 ABC corporations preferred shares are selling the market for Rs 75/-. You have read its annual
reports and you know that the shares are giving Rs 6.56/- on these preferred shares per annum. What is
the markets required rate of return of ABCs preferred share?

Q.9 Common shares of ABC corporation are available in the market for Rs 665/- per share.
Yesterday ABC announced a dividend on these shares of Rs 30/- each. The company has shown an
impressive constant growth of 8% per year in the past and all indications are that this will continue in
the future also. If your required rate of return on such shares is 13%, should you purchase the share at
the market rate?

Q.10 You have purchased common share of ABC corporation at the market price of Rs 665/- which is
expected to give a dividend of Rs 30 one year from now. The company has shown a constant growth of
3% in the past years and this trend is expected to continue in the future also. If the market required rate
of return on such common stock is 13%, then what is the yield that you will achieve?

Q.11 What business is a Going Concern and which business is not a Going Concern? Explain briefly.

Q.12 It is considered that ABC corporation is no longer a Going Concern. You are owner of 1000
common shares of ABC corporation and which you now want to sell. You have seen the latest balance
sheet of the company and you know that the company’s assets are Rs 6,750,000/- while its liabilities are
Rs 1,200,000/-. The number of common shares outstanding are one million. What is the Book Value of
each common share of ABC corporation? If the liquidation value of ABC’s assets is Rs 9,750,000/- and
the liquidation value of its liabilities is Rs 1,450,000/-, then what is the liquidation value to the common
shares of the ABC corporation.
Q.13 Do you think that these methods of calculating the value of common shares has its limitations?
Explain briefly.