Bond Management
Bond Management
Bond Management
FINAL CA
MAY '19
REVISION NOTES
Strategic Financial Management
Bond Management
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J.K.SHAH CLASSES FINAL C.A. – STRATEGIC FINANCIAL MANAGEMENT
BOND MANAGEMENT
Q.1. A is willing to purchase a 5 years Rs. 1000 par value bond having a coupon rate of 9%.
A’s required rate of return is 10%. How much A should pay to purchase the bond if it
matures at par.
Q.2. A PSU is proposing to sell a 8 years bond of Rs. 1000 at 10% coupon rate per annum.
The bond amount will be amortised equally over its life. If an investor has a minimum
required rate of return of 8%, what is the bond’s present value.
Q.3. A 6 years bond of Rs.1000 has an annual rate of interest of 14%. The interest is paid
half yearly. If the required rate of return is 16% what is the value of the bond.
Q.4. XYZ Ltd has issued convertible debentures with interest rate of 12%. Every debenture
has an option to convert to 20 equity shares at any time until the date of maturity.
Debentures will be redeemed at Rs. 100 on maturity which is after 5 years. An investor
normally requires a rate of return of 8% per annum on a 5 year security. As an investor
when will you exercise the purchase option if MV of ES is (a) ` 4, (b) ` 5 or (c) ` 6.
Q.5. There is a 9% 5 year bond issue in the market. The issue price is Rs. 90 and the
redemption price is Rs. 105. For an investor with marginal income tax rate of 30% and
capital gains tax rate of 10% (assuming no indexation), what is the post-tax yield to
maturity?
Q.7. Given a 2 year 8% annual coupon bond with a face value of ` 1000 and with annual
coupon payments that is fully taxable and selling at par and an identical bond that is tax
free, what would the yield and price on the tax free bond have to be for an investor in a
35% tax bracket to be indifferent between the two bonds
Q.9. The bonds of Texas Industries of face value ` 100 with 10% coupon paid semiannually
is presently selling at 5% discount on the face value. These bonds will be redeemed at
par by equal instalment at the end of 5th and 6th years. The effective tax rate of Texas
is 40%. What is the YTM of the bond.
Q.10. An investor purchased at a par a bond with a face value of ` 1000. The bond had 5
years to maturity and a 10% coupon rate. The bond was called two years later for a
price of Rs. 1200 after making its second annual interest payment. He then reinvested
the proceeds in a bond selling at its face value of ` 1000 with three years to maturity
and a 7% coupon rate. What was his actual YTM over the 5 year period.
:1: REVISION NOTES – MAY ‘19
J.K.SHAH CLASSES FINAL C.A. – STRATEGIC FINANCIAL MANAGEMENT
Q.11. An investor acquired at par a bond for ` 1000 that offered a 15% coupon rate. At the
time of purchase, the bond had 4 years to maturity. Assuming annual interest
payments, calculate his actual yield to maturity if all the interest payments were
reinvested in an investment earning 18% per yer. What would his actual yield to
maturity be if all interest payments were spent immediately upon receipt.
Q.13. Find the current market price of a bond having face value of ` 1,00,000 redeemable
after 6 years maturity with YTM at 16% payable annually and duration of 4.3202 years.
Given 1.166 = 2.4364
Q.14 .(a) Consider two bonds with 5 years to maturity and other with 20 years to maturity.
Both the bonds have a face value of ` 1,00,000 and coupon rate of 8% (with
annual interest payments and both are selling at par. Assume that the yields of
both of bonds fall to 6%, whether the price of the bond will increase or decrease?
What percentage of this increase / decrease comes from a change in the present
value of bond’s principal amount and what percentage of this increase / decrease
comes from a change in the present value of bond’s interest payment.
(b) Consider a bond selling at its par value of `1000 with 6 years to maturity and a 7%
coupon rate (with annual interest payment), what is the bond’s duration?
(c) If the YTM of the bond in (b) above increase to 10%, how it affects the bond’s
duration? And why?
(d) Why should the duration of a coupon carrying bond always be less that the time to
maturity?.