Question

A bond was issued on 1st April 2014at par for $1000 bearing an interest rate of 8% per annum. The interest is payable at each year end on 31st March. The bond redeemable at the end of 10th year from the date of issue at 10% premium. At present i.e. on 25th March 2018, such bond can be purchased in open market at the price of $1,023. The investor expects a rate of return of !0% per annum. Identify the following: 1. Face Value 2. Issue Price 3. Coupon Rate 4.Coupon Payment 5.Maturity Date 6.Redemption Price 7.Market Value as on 25-03-2018 8.Intrinsic Value on 31-03-2018

Answer 1

1.   Face value= $1,000

2. Since it is given that the bond is issued at par, issue price is equal to face value ie., $1,000

3. Coupon rate is the interest rate, given as 8% p.a.

4. Interest payment is stated as yearly on 31^st March which is the yearly frequency.

Coupon payment= Face Value*Coupon rate/number of payments a year= 1000*8% = $80

5. Given, issue date= 1 April 2014 and redemption at the end of 10^th year.

Therefore, Redemption date= 31 March 2024

6. Given, redemption premium= 10%

Redemption price= Face value*(1+premium) = 1000*(1+10%) = 1000*1.1= $1,100

7. Market value as on 25-03-2018 is given as $1,023

8. As on 31-03-2018, it has completed 4 years. Remaining term to maturity= 10-4 = 6 years

Intrinsic value as on 31-03-2018 with rate of return of 10% p.a. = $ 969.34   calculated using PV function of Excel as follows: