Value of Bond = Where r is the discounting rate of a compounding period i.e.

10%/2 = 5% _ _ (Semi
Annual) Coupon 8%/2 = 4% Answer a) And n is the no of Compounding periods 5 years * 2 = 10
periods _ _ (Semi Annual)

3.B The longer the maturity of a bond selling at a discount, all else held constant, the lower the price of
the bond.

2. A speculator has purchased land along the Hawassa Lake. He has taken out a ten-year loan with
annual payments of Birr 75,000. The loan rate is 6%. At the end of ten years, he believes he can sell
the land for Birr 600,000. If he is correct on the future price, did he make a wise investment? Show
your computation

Ans.

PV- 75,000

R- 6%

N- 10 YRS

FV-?

FV= PV*(1+R)N

FV= 75,000*(1+0.06)10

FV= 75,000*(1.79)

FV=134,313.57

3. Moore Company is about to issue a bond with semiannual coupon payments, a coupon rate of 10 %
and a par value of $ 1,000. The yield to maturity for this bond is 8%.

a. What is the bond price if it matures in five, ten, fifteen, or twenty years? Ans. FV = The Bond’s Face
Value = 1000

N = (Number of payments per period) x (Number of years to maturity) = (2) x (5) = 10

i = (YTM) / (Number of payments per period) = (8%) / (2) = 4% or 0.04

PMT = (FV) x (Coupon Rate) / (Number of payments per period) = (1000) x (10%) / (2) = 50
 PMT x [1 – (1 + i)-N] + FV x (1 + i)-N
Bond Price = i       

Bond price for 5 years = 50*[1-(1+.04)-10] + 1000(1+.04)-10

0.04
= 50*[1-(0.675)] +1000*0.675
0.04
Bond price for 10 years= 50*[1-(1+0.04)-20] + 1000*(1+0.04)-20
0.04
= 50*[1-(0.456)] +1000*0.456
0.04
Bond price for 15 years = 50*[1-(1+0.04)-30] +1000 (1+0.04)-30
0.04
b. What do you notice about the bond price in relation to the bond’s maturity?
Ans.
4. Nahom and Kidus are having a discussion about which financial model to use for their new
business. Kidus supports the NPV, and Nahom supports the IRR. The discussion starts to intensify
when Henock steps in and states, “Gentlemen, it doesn’t matter which method you choose. They give
the same answer on all projects.” Is Henock correct? Under what conditions will IRR and NPV be
consistent when accepting or rejecting projects?

Ans. First of let’s define both terms. NPV stands for Net Present Value, and it represents the positive
and negative future cash flows throughout a project’s life cycle discounted today. NPV represents an
intrinsic appraisal, and it’s applicable in accounting and finance where it is used to determine
investment security, assess new ventures, value a business, or find ways to effect a cost reduction.

Whereas, IRR or Internal Rate of Return is a form of metric applicable in capital budgeting. It is used to
estimate the profitability of a probable business venture. The metric works as a discounting rate that
equates NPV of cash flows to zero.

Both methods show comparable results regarding “accept or reject” decisions where independent
investment project proposals are concerned. In this case, the two proposals don’t compete, and they
are accepted or rejected based on the minimum rate of return on the market.

Conventional proposals often involve a cash outflow during the initial stage and are usually followed by
a number of cash inflows. Such similarities arise during the process of decision-making. With NPV,
proposals are usually accepted if they have a net positive value. In contrast, IRR is often accepted if the
resulting IRR has a higher value compared to the existing cutoff rate. Projects with a positive net present
value also show a higher internal rate of return greater than the base value.

So, NPV and IRR will be consistent in accepting or rejecting projects under the following conditions:
 All projects are available for acceptance regardless of the decision made on another project
(projects are not mutually exclusive).
 The hurdle rate for IRR is the same as the discount rate for NPV.
 The projects have standard cash flows.