1.

0 BOND PRICE BEHAVIOUR

• Interest rate
✓ The behaviour of interest rate is the single most important force in the bond
market
✓ Interest rates and bond prices move in opposite directions.
✓ When interest rates rise, bond prices fall and when interest rates drop, bond
prices move up.
• Required rate of return and coupon rate
✓ When required rate of return (k) = coupon interest rate, bond will sell at PAR
✓ When required rate of return (k) > coupon interest rate, bond will sell at
DISCOUNT
✓ When required rate of return (k) < coupon interest rate, bond will sell at
PREMIUM
• At premium, discount or par
✓ At Par: bond is selling at its par value which is RM1,000.
✓ Premium Bond: A premium bond is a bond trading above its par value.
For example:
“…… the bond is selling 30% at premium …….”
The words premium indicates the bond is selling 30% higher than its par
value. How to calculate?
RM1,000 × 30% = RM300
Bond price = RM1,000 + RM300 = RM1,300
So, the bond price is RM1,300 which are RM300 more than the par value
• Discount Bond: A discount bond is a bond that is issued for less than its par
value.
For example:
“……. the bond is selling 40% discount than its par value …….”
The words discount indicates the bond is selling 40% lower than its par value.
How to calculate?
RM1,000 × 40% = RM400
Bond price = RM1,000 − RM400 = RM600
So, the bond price is RM600 which RM400 less than the par value.
2.0 BOND VALUATION
2.1 Intrinsic Value / Fair Value / Real Value / Bond Price:

Required rate of return

Coupon Rate

Years remaining to maturity

CR × PV
Vb = (PVIFAk/m, n×m ) + 𝑷𝑽(PVIFk/m, n×m )
m

How many times CP is paid in a year/ term of interest

• Intrinsic/Fair/Real value refers to how much investor should pay for the bond.
If the price offers (MP) is higher than intrinsic value, then investor should not
buy, because the bond is overpricing. But, if the price offered (MP) is low
than the intrinsic value, investor should buy, because the bond is under-
pricing.
Vb < MP = Overpricing / Overvalued – should not buy
Vb < MP = Under-pricing / Undervalued – should buy
• In the formula, n=indicates how many years left to reach the maturity. It is
recommended to use timeline in order to find n.
For example:
“a 9 percent, 25-year bond issued six years ago currently priced in the market
at RM980….”
25 years – maturity period means that the bond issues last long until 25
years
6 years – how long the bond was issued, six years ago so as t to date, bond
was at year 6

Year 0 Year 6 How to find n? Year 25

Bond start issued Today n = 25 – 6 = 19 Maturity
 Another example:
“Lace Corp had just issued a 14 percent, 20-year bond where the prevailing…”
20 years – maturity period means that the bond issues las long until 20 years.
Had just issued – as at to date the bond was at year 0.

Year 25
Year 0
Maturity
Bond start issued
n = 20

Another example:
“…. 10 percent coupon bond will mature in another 5 years….”
n = ______ years

• m =indicates how many times coupon payment is paid in a year, or we called

as term of interest. If the question mentions:
annually: m =1
semi-annually: m =2
quarterly: m =4
monthly: m =12
• Therefore, k and n are depending on m;
annually: m = 1, so k/1 and n x 1
semi-annually: m = 2, so k/2 and n x 2
quarterly: m = 4, so k/4 and n x 4
monthly: m = 12, so k/12 and n x 12
• k refers to required rate of return also mention as current market yield,
expected return, and market interest rate.
Let us try this!
Faz Corp is interested to invest in bonds. Currently its Financial Manager is evaluating
Bond A and Bond B as follows:
Bond A: pays 9% coupon semi-annually and matures in 12 years
Bond B: A 7%, 13-year bond issued 3 years ago.
Determine the value of each bond if the current market yield for both bonds is 8%.
Solution: Bond A
(CR × PV)
Vb = (PVIFA k ) + 𝑃𝑉 (𝑃𝑉𝐼𝐹 𝑘 )
m m
,n×m m
,n×m

(9% × 1,000)
Vb = (PVIFA 8% ) + 1,000 (PVIF8% )
2 2
,12×2
2
,12×2

Vb = 45(PVIFA4%,24 ) + 1,000(PVIF4%,24 )
Vb = 45(15.247) + 1,000(0.3901)
Vb = RM1,076.215

Bond B?
Past Semester Questions
1. Corus Berhad is interested to invest in bonds. Currently, the financial manager is
evaluating both Bond A and Bond B. Bond A pays 8 percent coupon semi-annually and
matures in 12 years. Bond B pays 7 percent coupon annually having a maturity period
of 13 years. Determine the value of each bond if the current market yield for both
bonds is 8 percent. (December 2019)
(5 marks)

2. Mardhiah is interested to invest in bonds and currently considering between these two
(2) bonds:

Bond X Bond Y
Coupon rate 9 percent 10 percent
Term of interest Quarterly Annually
Maturity 10 15
Issue date Today 4 years ago
Market price RM1,200 RM1,300

The market yield and call price are 4 percent and RM1,400 respectively for both bonds.
Compute the value of each bond. (August 2019)
(5 marks)

3. Raihana is interested to invest in bonds and is currently considering between these

three (3) bonds:

Bond Mama Bond Papa Bond Mami

Coupon rate 8 percent 10 percent 15 percent
Term of interest Semi-annually Annually Annually
Maturity 8 years 14 years 20 years
Market price RM880 RM1,200 RM930
Call date - Year 10 Year 10
Call price - At premium 12% RM1,250

The market yield is 10 percent for all bonds.

i. Compute the value of Bond Mama, Bond Papa and Bond Mami.
(9 marks)
ii. State which bond should Raihana buys. (August 2018)
(1 mark)
4. Lola is helping her father, Mr. Lulu to decide on which bond to invest. Below is the
information about the bonds:

Calum Bond Scott Bond

Issued year 2017 2017
Year of maturity 2027 2037
Coupon rate 5 percent 10 percent
Selling price RM900 RM1,100

If the required rate of return is 10 percent, calculate the value of each bond. (June 2018)
(6 marks)

5. Simon interested to invest in bonds that is currently considering between these three
(3) bonds:

Bond AA Bond BB Bond CC

Coupon rate 6 percent 8 percent 10 percent
Term of interest Semi-annually Annually Annually
Maturity 8 years 14 years 20 years
Market price RM880 RM1,200 RM930
Call date - Year 10 Year 10
Call price - At premium 12% RM1,250

The market yield is 10 percent for all bonds. Compute:

i. The value of Bond AA, Bond BB and Bond CC
(9 marks)
ii. State which bond would Simon buy. (February 2018)
(1 mark)

6. Delite Corp is planning to invest in bonds. At present, there are two bonds being
offered in the market. The first is 8 percent, 10-year bond issued by Kasih Berhad and
the second is a 10 percent, 12-year bond issued by Abadi Berhad. Compute the value
of each bond if the expected return is 20 percent. (January 2018)
(6 marks)

7. LACE Corp. had just issued a 14 percent, 20-year bond that pays semi-annually
coupon. If the prevailing market interest rate is at 12 percent, find the value of the
bond. (September 2015)
(5 marks)
2.2 Yield to Maturity

Years remaining to maturity

CR × PV PV - MP
)(+ ( ) Market price /
YTM = m n ×m Selling price
PV + MP
( 2 )

Coupon Rate
How many times CP is paid in a year / term of interest

• Yield to maturity refers to the total return that will be earned by someone
who purchases a bond and holds it until its maturity date.
• The yield to maturity might also be referred to as yield, internal rate of return,
or the market interest rate at the time that the bond was purchased by the
investor. The yield to maturity is expressed as an annual percentage rate.
• Should be noted that n (years remaining to maturity) and m (how many time
CP is paid in a year / term of interest) used in calculating the YTM and value
of bond provide the same denotation.

Let us try this!

A bond is priced in the market at RM1,150 and has a coupon of 8 percent, 10
years to maturity. Calculate the yield to maturity.
Solution:
CR × PV PV − MP
( )+( )
YTM = m n×m
PV + MP
( )
2
m = 1 (if the question doesn’t mention semi/quarter/monthly so just
assume annually)
n = 10 years
 8% × 1,000 1,000 − 1,150
( )+( )
YTM = 1 10 × 1
1,000 + 1,150
( )
2

80 + (−15)
YTM = = 0.0605 = 6.05%
1,075

Past Semester Questions

1. Kemboja Berhad has an 8 percent, 30-year bond issued 18 years ago. The interest of
the bond is paid semi-annually. Currently, the bond sells at a premium of 25 percent.
The required rate of return is 14 percent. Find the rate of return earned by an investor
if the bond is held until maturity. (February 2023)
(3 marks)

2. Mega Berhad has a 15-year bond that currently is selling at 90 percent of its par value
with 10 percent coupon rate paid semi-annually. The bond was issued 5 years ago.
Calculate the Yield to Maturity (YTM). Justify your answer whether investors should
or should not buy this bond if the required rate of return is 8 percent. (December 2018)
(5 marks)

3. Mrs Janam has decided to invest RM980 in a 15 percent semi-annual, 5 years bond.
What is the yield to maturity of the bond? (October 2018)
(4 marks)

4. Mr Lulu has decided to invest in a 10 percent semi-annual, 3 years bond. Currently,

the bond is trading at RM990. What is the yield to maturity of the bond? (June 2018)
(4 marks)

5. A bond is priced in the market at RM300 and has a coupon of 8 percent, 6 years to
maturity. Calculate the yield to maturity. (January 2018)
(4 marks)

6. Bond QQ with 15 years of maturity was issued 6 years ago by Rambo Bhd. The coupon
rate is at 10 percent, semi-annual basis. Bond QQ is currently sold at RM920. Calculate
the yield to maturity. (March 2017)
(3 marks)
7. Shahrul has decided to invest RM850 in 12 percent semi-annual coupon for 5 years
bond. Determine the yield to maturity. (March 2016)
(3 marks)

8. A 9.5 percent, 25-year bond issued 6 years ago is currently priced in the market
at RM980. Calculate the yield to maturity. (September 2015)
(3 marks)

2.3 Yield to Call

Years remaining until called

Call Price

CR × PV CP - MP Market price /
( ) + ( )
YTC = m n ×m Selling price

CP + MP
( 2 )
Coupon Rate

Call Price
How many times CP is paid in a year / term of interest

• Refers to the return that investor would earn if they hold a bond until its call
date before the bond matures. In other words, it is the earnings you would
receive if you hold the bond until it was called before it matured.
• Many bonds have call features (or call options), which give the issuer the
right to retire the bond prior to maturity. A bond is callable when the issuer
has the right to return the investor’s principal and terminate all interest
payments before the bond matures.
• For example, a bond that matures in 2030 might become callable in 2020.
Issuers must clearly specify whether their bonds are callable, and the precise
terms of the call option when the bonds are first offered for sale.
• Call Price (CP) is the price a bond issuer must pay investors if it wants to buy
back, or call, an issue bond before the maturity date.
• For example:
“…..the issuer may call back the bonds after 7 years at RM1,100….”
Call price is ________.
• n in YTC indicates as years remaining until called. How to identify the ‘n’?

For example:
“A 12-year bond, with 10 percent coupon will mature in another 4 years. The
market price of the bond is RM1,040. The issuer expects to call back the bond
after 10 years from the issued date at a price of RM1,100”.

Year 0 Year 8 Year 10 Year 12

Bond start issued Today Callable Maturity

n=10-8=2

By using timeline, how many years left before the bond can start to be called
can be identify. The bond will mature in another 4 years, therefore today, the
bond at Year 8. The bond only can be called after 10 years issued (when the
bond at Year 10, then only the bond can be called back by the issuer. From the
timeline, n = 10 – 8 = 2 years. Therefore, the bond still has another 2 years
before the issuer can start to call.

Solution:

CR × PV CP − MP
( )+( )
YTC = m n×m
CP + MP
( )
2
10% × 1,000 1,100 − 1,040
( )+( )
YTC = 1 2 × 1
1,100 + 1,040
( )
2
100 + 30
YTC = = 0.1215 = 12.15%
1,070
Past Semester Questions
1. Mega Berhad has a 15-year bond that currently is selling at 90 percent of its par value
with 10 percent coupon rate paid semi-annually. The bond was issued 5 years ago.
The company will call the bond after 7 years at the price of RM1,100. Calculate the
Yield to Call (YTC). (December 2018)
(3 marks)

2. Bond QQ with 15 years of maturity was issued 6 years ago by Rambo Bhd. The coupon
rate is at 10 percent, semi-annual basis. Bond QQ is currently sold at RM920. The
issuer expects to call back the bond after 8 years from the issued date at RM1,100.
Calculate the yield to call. (March 2017)
(3 marks)

3. Find the yield to call on a semi-annual coupon bond with a face value of RM1,000, a
10 percent coupon rate and 15 years remaining until maturity. Given that the bond
price is RM1,175 and it can be called 5 years from now at a call price of RM1,100.
(November 2016)
(3 marks)

4. A bond with a coupon rate of 12 percent is selling for RM950. The issuer may call back
the bond after 6 years at RM1,200. Determine the yield to call on this bond. (March
2016)
(3 marks)

5. A 9.5 percent, 25-year bond issued 6 years ago is currently priced in the market at
RM980. The issuer expects to call back the bond after 10 years from the issued date
RM1,100. Calculate the yield to call. (September 2015)
(3 marks)

6. A 10-year, 10 percent coupon bond with a par value of RM1,000 will mature in another
5 years. It is currently selling at RM1,020. The issuer expects to call back the bond
after 8 years from the issued date at RM1,100. Calculate the yield to call. (September
2013)
(3 marks)

7. Gold Berhad has a bond that currently sells at 90 percent of its par value with 10
percent coupon rate and 10 years to maturity. Calculate its yield to call if Gold Berhad
decided to call back the bond after 7 years at RM1,000. (March 2012)
(4 marks)
 2.4 Current Yield
• Current yield is the rate of return on a bond investment. This is the return on
investment that the buyer of a bond can expect to experience by acquiring
the security now and holding it for the next year. Current yield is presented
as a percentage and is calculated as the annual coupon payment made by
the bond issuer, divided by the current price of the bond.
• For example:
ABC Corporation has issued a bond with RM1,000 face value and an 8%
annual coupon rate. The current market price of the bond is RM985, so the
current yield is calculated as follows:
CR × PV 8% × 1,000
CY = = = 8.12%
MP 985
Past Semester Questions
1. Bryant Enterprise just issued RM1,000 par 30-year bonds. The bonds sold for
RM1,107.20 and pay interest semi-annually. Investors require a rate of 8 percent on
the bonds. Find the bonds’ coupon rate. (February 2023)
(5 marks)

2. Mega Berhad has a 15-year bond that currently is selling at 90 percent of its par value
with 10 percent coupon rate paid semi-annually. The bond was issued 5 years ago.
The company will call the bond after 7 years at the price of RM1,100. Calculate the
current yield. (December 2018)
(2 marks)

3. Suria Tenaga Corporation bonds are selling in the market for RM920 per unit. These
10-year bonds pay 8 percent interest annually on a RM1,000 par value. Considering
this investment opportunity, you plan to buy the bond and your required rate of return
is 10 percent. Compute the current yield. (May 2016)
(2 marks)

4. Cheju Berhad has an 8 percent, 30-year issued 18 years ago. The interest of the bond
is paid semi-annually. Currently, the bond sells at a premium of 25 percent. The
required rate of return is 14 percent. Compute the current yield. (September 2014)
(3 marks)

5. Gold Berhad has a bond that currently sells at 90 percent of its par value with 10
percent coupon rate and 10 years to maturity. Calculate its current yield. (March 2012)
(2 marks)
6. A 10 percent coupon bond with a par value of RM1,000 matures in 13 years. It is
currently selling at RM920. Calculate the current yield. (April 2011)
(2 marks)