Valuation and Pricing

Ammar Hafeez
Practice question 1
An 15 year bond is valued at INR 10000. It has a
coupon rate of 8 percent per annum. The bond is
to be matured after 15 years at par.
An investor is interested to invest into it.
However, his required rate of return is 9 percent.
Calculate the present value of this bond and
advice whether the investor should buy it or
not!?!
 Interest to be received every year = INR 800

= 800 + 800 + 800 + 800 + 800 + 800 + 800 + 800 + 800 +

800 + 800 + 800 + 800 + 800 + 800 + + 10000
= 800 x 8.061 + 10000 x 0.275
= 6448.8 + 2750
= 9198.8

The current value of the bond is INR 9198.8

Since we have to pay an INR 10000 to buy it, we would
not proceed with it. As the amount we are paying is
more than the current value of the bond.
• In the same question, what if our required rate of
return is 11 percent?
Practice question 2
An investor seeks your advice on the following
bond information:
Bond face value : INR 1200
Coupon rate : 8 percent
Required rate of return (ROR) : 8 percent
No of years it will be in the market : 5 years
It will mature at par.

• What would be the value of the bond?

• Would you advice the investor to buy the bond?
 Interest to be received every year = INR 800

= 96 + 96 + 96 + 96 + 96 + 1200
= 96 x 3.993 + 1200 x 0.681
= 383.328 + 817.2
= 1200.528

The current value and the price of the bond are

same i.e. INR 1200.
Therefore, the investor is indifferent; he can buy
it or forego it.
Practice question 3
A bond is being floated in the market with the
face value of INR 5000. It has a maturity period of
13 years.
The coupon rate is 15 percent. However, it
matures at a premium of 10 percent.
An investor is confused, whether to invest into
this bond or not. His required rate of return (ROR)
is 6 percent.
You are required to take the decision on his
behalf!?!
Practice question 4
Compute the present value of a bond, with the
following information:
Bond face value : INR 5000
Interest payment : INR 500
ROR : 8 percent
No of years of investment : 16 years

Maturity is at
a) Par
b) Premium of 10 percent
c) Discount of 10 percent
Practice question 5
Bonds of Tintin Ltd. are being floated at a par value of
10000.
They have a fixed coupon rate of 7.5 percent. The
maturity is of 10 years at par.

An investor has two options. Option A is investing into

real estate and earning a return of INR 11000 (already
discounted TVM).
Option B is based on the investor’s required rate of return
of 6 percent.
Being his financial advisor, compute both the options for
him and suggest the best one!
Practice question 6
A bond is priced at INR 10. The coupon rate is 10
percent calculated semi annually. It will mature
after 8 years at 15 percent premium.
An investor who is interested wants to buy 50
such bonds, she has an ROR of 6 percent.
You are required to calculate the present value of
such 50 bonds.
Practice question 7
Ms. UVWXYZ has an amount of INR 100000 to invest. She has three
options :
Option A
Put the money into a lottery, wherein she is sure shot to win an amount
of 110000 (already discounted TVM).
Option B
Take bonds of face value of INR 100 each of TULIP Ltd., whose coupon
rate is 5 percent. They are redeemable at par after a period of 9 years.
However, Ms. UVWXYZ has a condition. She anyhow needs a return of 4
percent.
Option C
Invest the money into government securities which yield a guaranteed
return of INR 107500 (already discounted TVM).

On your understanding of the concept of time value of money, you are

required to rate each option as which one is the best, the better and the
worst.