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TOPIC 2: BONDS VALUATION

EXERCISE 1

PART A CONCEPTUAL PART

1. What are the basic differences among book value, liquidation value, market value and
intrinsic value?
2. Explain the factors that determine the intrinsic value of economic value of asset.
3. Explain the relationship between an investor’s required rate of return and the value of
a security.
4. Define (a) eurobonds (b) zero coupon bonds (c) junk bonds (d) Income bonds
5. How does the market value of a bond differ from its par value when the coupon
interest rate does not equal the bondholder’s required rate of return? (Explain the
relationship).
6. Differentiate between a premium bond and a discount bond.

PART B

Question 1
Calculate the value of bond that matures in 12 years and has RM1,000 face value. The
coupon interest rate is 8 percent and the investor’s required rate of return is 12 percent.

Question 2
Enterprise, Inc. 10-year bond has a 9 percent coupon rate paid semi annually. This bond has
been issued 2 years ago. If your required rate of return is 10 percent, what is the value of the
bond?

Question 3
The market price is RM900 for a 10-year bond that pays 8 percent interest semiannually.
What is the bond’s expected rate of return?

Question 4
Chikky Industries 15-year, RM1,000 par value bonds pay 8 percent interest annually. The
market price of the bonds is RM1,085.
a) Compute the bond’s expected rate of return.
b) Determine the value of the bond to you if your required rate of return is 10 percent.
c) Should you purchase the bond? Why?

Question 5
Lina is holding a bond with 25 years of maturity at a coupon rate of 8% which pays annually.
After holding the bond for 10 years, Lina plans to sell it. You are interested to buy the bond
from Lina.
a. Thus, you need to know the fair value of the bond today if your required rate of
return is 12%
b. Will you buy the bond if Lina plans to sell it at RM800? Why?

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Question 6
Suppose you buy a 7% coupon, 20-year bond today when it’s first issued. If interest rates
suddenly rise to 14%, what happens to the value of your bond? Why?

Question 7
Borderline Co. issued 11-year bonds one year ago at a coupon rate of 8.2%. The bonds make
semiannual payments. If the YTM on these bonds is 7.4%, what is the current bond price?

Question 8
Aragon Co. has 10% coupon bonds on the market with 9 years left to maturity. The bonds
make annual payments. If the bond currently sells for RM884.50, what is the current bond
yield?

Question 9
Superstar Enterprise has bonds on the market making annual payments, with 16 years to
maturity, and selling for RM870. At this price, the bonds yield 6.8%. What must be the
coupon rate?

(We did not discuss this type of question in class, but you can try it out using the same
formula for bond valuation)

Question 10
HSD Co. needs to raise funds to finance a plant expansion, and it has decided to issue 20-year
zero coupon bonds to raise the money. Currently, these bonds are sold at RM289.60.
Calculate the expected rate of return for the bond.

Question 11

Question 12

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Question 13

Question 14