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Bond Valuation - Exercise for you to do
Advanced Financial Management (BWFF2043)
Universiti Utara Malaysia
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BWFF2043 AFM- BOND VALUATION 17 APRIL 2022
Janet and Adam are married and both of them are in their mid-thirties. They have been very conservative with the little money that they managed to save over the years. So far, they have saved RM20,000 at their local bank. With a return of less than 5% on their savings, the couple realizes that they need a more aggressive investment strategy if they are ever going to be able to live comfortably in retirement. They are interested in investing in bonds, but they know very little about their valuation. They have contacted you, an investment advisor, to assist them with their investment strategy. You begin the session by discussing the following questions with the couple to familiarize them with bonds:
How is the value of any financial asset being determined?
Find the value if a 1-year, RM1,000 par value bond with 12 percent annual coupon if the required rate of return is 12 percent. What is the value of a similar 10-year bond?
What would be the value of the bonds describe in (2) if investors requires a 15 percent return? A 9 percent return? What happen to the value of the 10-year bond?
Between the 1-year bond and the 10-year bond, which bond is more sensitive to the change in interest rate?
Given the opportunity to invest in one of the three bonds listed below, which would you purchase and why? Assume an interest rate of 7%.
Bond Face Value Annual Coupon Rate
Maturity Price
A 1000 4% 1 year RM
B 1000 7% 17 years RM
C 1000 8% 25 years RM
Why do investors pay attention to bond ratings and demand a higher interest rate for bonds with low ratings?
What are the differences between bond’s coupon rate, current yield, and yield to maturity?
Orange Inc is currently having a temporary difficulty in paying its outstanding loans; therefore, the court permits the company to draw a new indenture on its outstanding bonds. These bonds have remaining 10 years to maturity and a coupon rate of 10 percent, paid annually. The new agreement allows the firm to pay no interest for the first 3 years. Then, interest payments will resume for the next 7 years as usual. At maturity (Year 10), in addition to the usual payment of interest and face value, the accumulated amount of interest that was not paid during the first 3 years will be paid in one lump sum. If the market required return is 20%, how much should these bonds sell for in the market today?
Bond Valuation - Exercise for you to do
Course: Advanced Financial Management (BWFF2043)
University: Universiti Utara Malaysia
