Zero Coupon Bond

Coupon Payments
Maturity
Maturity Value

0
3
100.00

Value

(years)

MV
(1 r ) n

Market Yield for a bond of the same risk and maturity (ann.): 10%
Compounding ONCE a year
Year
1
2
3
Future Cash Flow
0
0
100
Present Value
(or market value)

Rs. 75.13

The Present Value is the price that the company can realistically expect to "sell" its bond for.
If coumpounding is SEMIANNUAL:

Value

MV
74.6215
(1 r / 2) 2t
1
0

Cash Flow
Present Value
(or market value)

Six Months
3
4
0
0

2
0

5
0

6
100.00

Rs. 74.62

Coupon Bond
n

Coupon
Face Value
Maturity
Maturity Value

8%
100
3
100

Value
t 1

I
MV

t
(1 r )
(1 r ) n

(years)

Market Yield for a bond of the same risk and maturity (ann.): 9%
Compounding ONCE a year

1
8

Cash Flow
Present Value
(or market value)

Year
2
8

3
108

Rs. 97.47 Discount

The Present Value is the price that the company can realistically expect to "sell" its bond for.
If coumpounding is SEMIANNUAL:
2n

Value
t 1

Cash Flow

I
MV

t
(1 r / 2) (1 r / 2) 2 n
1
4

2
4

Six Months
3
4
4
4

5
4

6
104

Present Value
(or market value)

Rs. 97.42 Discount

Perpetuity
Coupon
Face Value
Maturity

Value

10%
100

t 1

I
I /r
(1 r ) t

(years)

Market Yield for a bond of the same risk and maturity (ann.): 12%
(or market value)

Rs. 83.33

As can be seen the market value is at a

Discount

The Present Value is the price that the company can realistically expect to "sell" its bond for.

Face Value
Coupon Rate

1,000
10%

Investment 1

Yield

0
-1,000
10%

1
100

2
100

3
100

Period
4
5
100
100

7
100

100

8
1,100

Investment 2

Yield

0
-1,000
10%

1
100

Period
2
3
100
100

4
100

5
1,100

If current Yield of the above investments is

9%
Then the price that a rational person would be willing to pay is
If current Yield of the above investments is
11%
Then the price that a rational person would be willing to pay is

Investment 1
1,055
Premium

949

Discount

Investment 2
1,039
Premium

963

Discount

Change in Value
Inv 1
Inv 2
-10.12%
-7.30%

Interest
Term (or maturity)
Face Value
Coupon rate
Maturity Value
Current market price

5
3
100
5.00%
100
96

(paid semiannually)
years
(paid semiannually)

Computation based on Semiannual interest

0
-96

Future Cash Flow

Yield
or,
NPV @ Yield
Present Value

1
5

2
5

5.81% (Semiannual interest)

11.95% (Annual interest)
Rs. 0.00
Rs. 100.00 (at coupon interest)

Six Month
3
5

4
5

5
5

11.62%

Computation based on Annual interest

Effective annual coupon rate
10.25%

100

Year
0.5
1
1.5
2
2.5
18/06/09
18/12/09
18/06/10
18/12/10
18/06/11
5.00
5.00
5.00
5.00
5.00
4.76190476 4.53514739 4.31918799 4.113512374 3.91763083

-96
11.96%
96
96

5.00
5.00
5.00
5.00
5.00
(Annual interest using XIRR)
(XNPV using Annual interest)
4.72549716 4.46606468 4.2208752 3.98914675 3.77014033

0
18/12/08
Future Cash Flow
PV at annual interest

Yield

6
105

3
18/12/11
105.00
78.3526166
105.00

74.8263072