Spartak Moscow Sdn Bhd owns a bond that pays RM400 in annual interest with a RM2
ID: 2338048 • Letter: S
Question
Spartak Moscow Sdn Bhd owns a bond that pays RM400 in annual interest with a RM2000 par
value. It matures in 20 years. The company requires rate of return is 14 percent.
(a) Calculate the value of the bond.
(5 marks)
(b) How does the value change of your required rate of return increases to 19 percent or
decrease to 10 percent?
(5 marks)
(c) Explain the implications of your answers in part (b) of question 4 as they relate to interest
rate risk, premium bonds, and discount bonds.
(5 marks)
(d) Assume the bond matures in 15 years instead of 20 years. Re-compute your answer in part
(b) of question 4.
(5 marks)
Explanation / Answer
a)Statement showing Price or Intrinsic Value ( since there is annual payment so coupon payment is 400, yield is 14% and number of years= 20) Particulars Time PVf @14% Amount PV Cash Flows (Interest) 1.00 0.8772 400.00 350.88 Cash Flows (Interest) 2.00 0.7695 400.00 307.79 Cash Flows (Interest) 3.00 0.6750 400.00 269.99 Cash Flows (Interest) 4.00 0.5921 400.00 236.83 Cash Flows (Interest) 5.00 0.5194 400.00 207.75 Cash Flows (Interest) 6.00 0.4556 400.00 182.23 Cash Flows (Interest) 7.00 0.3996 400.00 159.85 Cash Flows (Interest) 8.00 0.3506 400.00 140.22 Cash Flows (Interest) 9.00 0.3075 400.00 123.00 Cash Flows (Interest) 10.00 0.2697 400.00 107.90 Cash Flows (Interest) 11.00 0.2366 400.00 94.65 Cash Flows (Interest) 12.00 0.2076 400.00 83.02 Cash Flows (Interest) 13.00 0.1821 400.00 72.83 Cash Flows (Interest) 14.00 0.1597 400.00 63.88 Cash Flows (Interest) 15.00 0.1401 400.00 56.04 Cash Flows (Interest) 16.00 0.1229 400.00 49.16 Cash Flows (Interest) 17.00 0.1078 400.00 43.12 Cash Flows (Interest) 18.00 0.0946 400.00 37.82 Cash Flows (Interest) 19.00 0.0829 400.00 33.18 Cash Flows (Interest) 20.00 0.0728 400.00 29.10 Cash flows (Maturity Amount) 20.00 0.0728 2,000.00 145.60 Intrinsic Value of Bond or Current Bond Price 2,794.85 Value of bond is RM2794.85 b)Statement showing Price or Intrinsic Value ( since there is annual payment so coupon payment is 400, yield is 19% and number of years= 20) Particulars Time PVf @19% Amount PV Cash Flows (Interest) 1.00 0.8403 400.00 336.13 Cash Flows (Interest) 2.00 0.7062 400.00 282.47 Cash Flows (Interest) 3.00 0.5934 400.00 237.37 Cash Flows (Interest) 4.00 0.4987 400.00 199.47 Cash Flows (Interest) 5.00 0.4190 400.00 167.62 Cash Flows (Interest) 6.00 0.3521 400.00 140.86 Cash Flows (Interest) 7.00 0.2959 400.00 118.37 Cash Flows (Interest) 8.00 0.2487 400.00 99.47 Cash Flows (Interest) 9.00 0.2090 400.00 83.59 Cash Flows (Interest) 10.00 0.1756 400.00 70.24 Cash Flows (Interest) 11.00 0.1476 400.00 59.03 Cash Flows (Interest) 12.00 0.1240 400.00 49.60 Cash Flows (Interest) 13.00 0.1042 400.00 41.68 Cash Flows (Interest) 14.00 0.0876 400.00 35.03 Cash Flows (Interest) 15.00 0.0736 400.00 29.43 Cash Flows (Interest) 16.00 0.0618 400.00 24.73 Cash Flows (Interest) 17.00 0.0520 400.00 20.79 Cash Flows (Interest) 18.00 0.0437 400.00 17.47 Cash Flows (Interest) 19.00 0.0367 400.00 14.68 Cash Flows (Interest) 20.00 0.0308 400.00 12.33 Cash flows (Maturity Amount) 20.00 0.0308 2,000.00 61.60 Intrinsic Value of Bond or Current Bond Price 2,101.94 Value of bond is RM2101.94 Statement showing Price or Intrinsic Value ( since there is annual payment so coupon payment is 400, yield is 10% and number of years= 20) Particulars Time PVf @10% Amount PV Cash Flows (Interest) 1.00 0.9091 400.00 363.64 Cash Flows (Interest) 2.00 0.8264 400.00 330.58 Cash Flows (Interest) 3.00 0.7513 400.00 300.53 Cash Flows (Interest) 4.00 0.6830 400.00 273.21 Cash Flows (Interest) 5.00 0.6209 400.00 248.37 Cash Flows (Interest) 6.00 0.5645 400.00 225.79 Cash Flows (Interest) 7.00 0.5132 400.00 205.26 Cash Flows (Interest) 8.00 0.4665 400.00 186.60 Cash Flows (Interest) 9.00 0.4241 400.00 169.64 Cash Flows (Interest) 10.00 0.3855 400.00 154.22 Cash Flows (Interest) 11.00 0.3505 400.00 140.20 Cash Flows (Interest) 12.00 0.3186 400.00 127.45 Cash Flows (Interest) 13.00 0.2897 400.00 115.87 Cash Flows (Interest) 14.00 0.2633 400.00 105.33 Cash Flows (Interest) 15.00 0.2394 400.00 95.76 Cash Flows (Interest) 16.00 0.2176 400.00 87.05 Cash Flows (Interest) 17.00 0.1978 400.00 79.14 Cash Flows (Interest) 18.00 0.1799 400.00 71.94 Cash Flows (Interest) 19.00 0.1635 400.00 65.40 Cash Flows (Interest) 20.00 0.1486 400.00 59.46 Cash flows (Maturity Amount) 20.00 0.1486 2,000.00 297.20 Intrinsic Value of Bond or Current Bond Price 3,702.63 Value of bond is RM3702.63 c) When the interest rate risk increases from 14% to 19% then the price of bond decreases, hence it is a discount bond. When interest rate decreases from 14% to 10% then the price of bond will increase and hence it is a premium bond. d)Statement showing Price or Intrinsic Value ( since there is annual payment so coupon payment is 400, yield is 19% and number of years= 15) Particulars Time PVf @19% Amount PV Cash Flows (Interest) 1.00 0.8403 400.00 336.13 Cash Flows (Interest) 2.00 0.7062 400.00 282.47 Cash Flows (Interest) 3.00 0.5934 400.00 237.37 Cash Flows (Interest) 4.00 0.4987 400.00 199.47 Cash Flows (Interest) 5.00 0.4190 400.00 167.62 Cash Flows (Interest) 6.00 0.3521 400.00 140.86 Cash Flows (Interest) 7.00 0.2959 400.00 118.37 Cash Flows (Interest) 8.00 0.2487 400.00 99.47 Cash Flows (Interest) 9.00 0.2090 400.00 83.59 Cash Flows (Interest) 10.00 0.1756 400.00 70.24 Cash Flows (Interest) 11.00 0.1476 400.00 59.03 Cash Flows (Interest) 12.00 0.1240 400.00 49.60 Cash Flows (Interest) 13.00 0.1042 400.00 41.68 Cash Flows (Interest) 14.00 0.0876 400.00 35.03 Cash Flows (Interest) 15.00 0.0736 400.00 29.43 Cash flows (Maturity Amount) 15.00 0.0736 2,000.00 147.20 Intrinsic Value of Bond or Current Bond Price 2,097.55 Value of bond is RM2097.55 Statement showing Price or Intrinsic Value ( since there is annual payment so coupon payment is 400, yield is 10% and number of years= 15) Particulars Time PVf @10% Amount PV Cash Flows (Interest) 1.00 0.9091 400.00 363.64 Cash Flows (Interest) 2.00 0.8264 400.00 330.58 Cash Flows (Interest) 3.00 0.7513 400.00 300.53 Cash Flows (Interest) 4.00 0.6830 400.00 273.21 Cash Flows (Interest) 5.00 0.6209 400.00 248.37 Cash Flows (Interest) 6.00 0.5645 400.00 225.79 Cash Flows (Interest) 7.00 0.5132 400.00 205.26 Cash Flows (Interest) 8.00 0.4665 400.00 186.60 Cash Flows (Interest) 9.00 0.4241 400.00 169.64 Cash Flows (Interest) 10.00 0.3855 400.00 154.22 Cash Flows (Interest) 11.00 0.3505 400.00 140.20 Cash Flows (Interest) 12.00 0.3186 400.00 127.45 Cash Flows (Interest) 13.00 0.2897 400.00 115.87 Cash Flows (Interest) 14.00 0.2633 400.00 105.33 Cash Flows (Interest) 15.00 0.2394 400.00 95.76 Cash flows (Maturity Amount) 15.00 0.2394 2,000.00 478.80 Intrinsic Value of Bond or Current Bond Price 3,521.23 Value of bond is RM3521.23
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