Question

Exerpt taken from Engro Corporations press release:

“Engro Corp is one of Pakistan’s largest conglomerates, in operation for over 45 years, and with businesses ranging from fertilizers to power generation. Currently Engro Corp’s portfolio consists of seven businesses which include chemical fertilizers, PVC resin, a bulk liquid chemical terminal, industrial automation, foods, power generation and commodity trade.

Engro Corporation Limited has announced the launch of the second issue of the Engro Rupiya Certificates savings option, which provides investors with an unprecedented 14.5% (coupon) rate of return. This issuance follows the successful launch of the certificates in October 2010.

The second release of Engro Rupiya Certificates also offers profit payments twice in a year for a minimum amount of PKR 25,000, invested for a period of 3 years. The product offers investors the option to encash the certificates at any time, with the profit accumulated from the date of purchase to the date of encashment. Engro has also provided a unique service for the convenience of its customers, enabling certificate holders to conduct transactions and receive profit payments at home.”

1. Assuming the yield to maturity on the bond is 11.25%, calculate the price of the bond at the time of issue
2. Assuming the yield curve is flat and doesn’t shit, calculate the bond price two years after the issue?
3. Compare your answer to part 1 and justify.
4. Evaluate the relevance of the types of risk for this bond.

Answer 1