Question
In: Accounting
Spartak Moscow Sdn Bhd owns a bond that pays RM400 in annual interest with a RM2000...
Spartak Moscow Sdn Bhd owns a bond that pays RM400 in annual
interest with a RM2000 par
value. It matures in 20 years. The company requires rate of return
is 14 percent.
(a) Calculate the value of the bond.
(b) How does the value change of your required rate of return
increases to 19 percent or
decrease to 10 percent?
(c) Explain the implications of your answers in part (b) of
question 4 as they relate to interest
rate risk, premium bonds, and discount bonds.
(d) Assume the bond matures in 15 years instead of 20 years.
Re-compute your answer in part
(b) of question 4.
Solutions
Expert Solution
| a)Statement showing Price or Intrinsic Value ( since there is annual payment so coupon payment is 400, yield is 14% and number of years= 20) | |||||
| Particulars | Time | PVf @14% | Amount | PV | |
| Cash Flows (Interest) | 1.00 | 0.8772 | 400.00 | 350.88 | |
| Cash Flows (Interest) | 2.00 | 0.7695 | 400.00 | 307.79 | |
| Cash Flows (Interest) | 3.00 | 0.6750 | 400.00 | 269.99 | |
| Cash Flows (Interest) | 4.00 | 0.5921 | 400.00 | 236.83 | |
| Cash Flows (Interest) | 5.00 | 0.5194 | 400.00 | 207.75 | |
| Cash Flows (Interest) | 6.00 | 0.4556 | 400.00 | 182.23 | |
| Cash Flows (Interest) | 7.00 | 0.3996 | 400.00 | 159.85 | |
| Cash Flows (Interest) | 8.00 | 0.3506 | 400.00 | 140.22 | |
| Cash Flows (Interest) | 9.00 | 0.3075 | 400.00 | 123.00 | |
| Cash Flows (Interest) | 10.00 | 0.2697 | 400.00 | 107.90 | |
| Cash Flows (Interest) | 11.00 | 0.2366 | 400.00 | 94.65 | |
| Cash Flows (Interest) | 12.00 | 0.2076 | 400.00 | 83.02 | |
| Cash Flows (Interest) | 13.00 | 0.1821 | 400.00 | 72.83 | |
| Cash Flows (Interest) | 14.00 | 0.1597 | 400.00 | 63.88 | |
| Cash Flows (Interest) | 15.00 | 0.1401 | 400.00 | 56.04 | |
| Cash Flows (Interest) | 16.00 | 0.1229 | 400.00 | 49.16 | |
| Cash Flows (Interest) | 17.00 | 0.1078 | 400.00 | 43.12 | |
| Cash Flows (Interest) | 18.00 | 0.0946 | 400.00 | 37.82 | |
| Cash Flows (Interest) | 19.00 | 0.0829 | 400.00 | 33.18 | |
| Cash Flows (Interest) | 20.00 | 0.0728 | 400.00 | 29.10 | |
| Cash flows (Maturity Amount) | 20.00 | 0.0728 | 2,000.00 | 145.60 | |
| Intrinsic Value of Bond or Current Bond Price | 2,794.85 | ||||
| Value of bond is RM2794.85 | |||||
| b)Statement showing Price or Intrinsic Value ( since there is annual payment so coupon payment is 400, yield is 19% and number of years= 20) | |||||
| Particulars | Time | PVf @19% | Amount | PV | |
| Cash Flows (Interest) | 1.00 | 0.8403 | 400.00 | 336.13 | |
| Cash Flows (Interest) | 2.00 | 0.7062 | 400.00 | 282.47 | |
| Cash Flows (Interest) | 3.00 | 0.5934 | 400.00 | 237.37 | |
| Cash Flows (Interest) | 4.00 | 0.4987 | 400.00 | 199.47 | |
| Cash Flows (Interest) | 5.00 | 0.4190 | 400.00 | 167.62 | |
| Cash Flows (Interest) | 6.00 | 0.3521 | 400.00 | 140.86 | |
| Cash Flows (Interest) | 7.00 | 0.2959 | 400.00 | 118.37 | |
| Cash Flows (Interest) | 8.00 | 0.2487 | 400.00 | 99.47 | |
| Cash Flows (Interest) | 9.00 | 0.2090 | 400.00 | 83.59 | |
| Cash Flows (Interest) | 10.00 | 0.1756 | 400.00 | 70.24 | |
| Cash Flows (Interest) | 11.00 | 0.1476 | 400.00 | 59.03 | |
| Cash Flows (Interest) | 12.00 | 0.1240 | 400.00 | 49.60 | |
| Cash Flows (Interest) | 13.00 | 0.1042 | 400.00 | 41.68 | |
| Cash Flows (Interest) | 14.00 | 0.0876 | 400.00 | 35.03 | |
| Cash Flows (Interest) | 15.00 | 0.0736 | 400.00 | 29.43 | |
| Cash Flows (Interest) | 16.00 | 0.0618 | 400.00 | 24.73 | |
| Cash Flows (Interest) | 17.00 | 0.0520 | 400.00 | 20.79 | |
| Cash Flows (Interest) | 18.00 | 0.0437 | 400.00 | 17.47 | |
| Cash Flows (Interest) | 19.00 | 0.0367 | 400.00 | 14.68 | |
| Cash Flows (Interest) | 20.00 | 0.0308 | 400.00 | 12.33 | |
| Cash flows (Maturity Amount) | 20.00 | 0.0308 | 2,000.00 | 61.60 | |
| Intrinsic Value of Bond or Current Bond Price | 2,101.94 | ||||
| Value of bond is RM2101.94 | |||||
| Statement showing Price or Intrinsic Value ( since there is annual payment so coupon payment is 400, yield is 10% and number of years= 20) | |||||
| Particulars | Time | PVf @10% | Amount | PV | |
| Cash Flows (Interest) | 1.00 | 0.9091 | 400.00 | 363.64 | |
| Cash Flows (Interest) | 2.00 | 0.8264 | 400.00 | 330.58 | |
| Cash Flows (Interest) | 3.00 | 0.7513 | 400.00 | 300.53 | |
| Cash Flows (Interest) | 4.00 | 0.6830 | 400.00 | 273.21 | |
| Cash Flows (Interest) | 5.00 | 0.6209 | 400.00 | 248.37 | |
| Cash Flows (Interest) | 6.00 | 0.5645 | 400.00 | 225.79 | |
| Cash Flows (Interest) | 7.00 | 0.5132 | 400.00 | 205.26 | |
| Cash Flows (Interest) | 8.00 | 0.4665 | 400.00 | 186.60 | |
| Cash Flows (Interest) | 9.00 | 0.4241 | 400.00 | 169.64 | |
| Cash Flows (Interest) | 10.00 | 0.3855 | 400.00 | 154.22 | |
| Cash Flows (Interest) | 11.00 | 0.3505 | 400.00 | 140.20 | |
| Cash Flows (Interest) | 12.00 | 0.3186 | 400.00 | 127.45 | |
| Cash Flows (Interest) | 13.00 | 0.2897 | 400.00 | 115.87 | |
| Cash Flows (Interest) | 14.00 | 0.2633 | 400.00 | 105.33 | |
| Cash Flows (Interest) | 15.00 | 0.2394 | 400.00 | 95.76 | |
| Cash Flows (Interest) | 16.00 | 0.2176 | 400.00 | 87.05 | |
| Cash Flows (Interest) | 17.00 | 0.1978 | 400.00 | 79.14 | |
| Cash Flows (Interest) | 18.00 | 0.1799 | 400.00 | 71.94 | |
| Cash Flows (Interest) | 19.00 | 0.1635 | 400.00 | 65.40 | |
| Cash Flows (Interest) | 20.00 | 0.1486 | 400.00 | 59.46 | |
| Cash flows (Maturity Amount) | 20.00 | 0.1486 | 2,000.00 | 297.20 | |
| Intrinsic Value of Bond or Current Bond Price | 3,702.63 | ||||
| Value of bond is RM3702.63 | |||||
| c) When the interest rate risk increases from 14% to 19% then the price of bond decreases, hence it is a discount bond. | |||||
| When interest rate decreases from 14% to 10% then the price of bond will increase and hence it is a premium bond. | |||||
| d)Statement showing Price or Intrinsic Value ( since there is annual payment so coupon payment is 400, yield is 19% and number of years= 15) | |||||
| Particulars | Time | PVf @19% | Amount | PV | |
| Cash Flows (Interest) | 1.00 | 0.8403 | 400.00 | 336.13 | |
| Cash Flows (Interest) | 2.00 | 0.7062 | 400.00 | 282.47 | |
| Cash Flows (Interest) | 3.00 | 0.5934 | 400.00 | 237.37 | |
| Cash Flows (Interest) | 4.00 | 0.4987 | 400.00 | 199.47 | |
| Cash Flows (Interest) | 5.00 | 0.4190 | 400.00 | 167.62 | |
| Cash Flows (Interest) | 6.00 | 0.3521 | 400.00 | 140.86 | |
| Cash Flows (Interest) | 7.00 | 0.2959 | 400.00 | 118.37 | |
| Cash Flows (Interest) | 8.00 | 0.2487 | 400.00 | 99.47 | |
| Cash Flows (Interest) | 9.00 | 0.2090 | 400.00 | 83.59 | |
| Cash Flows (Interest) | 10.00 | 0.1756 | 400.00 | 70.24 | |
| Cash Flows (Interest) | 11.00 | 0.1476 | 400.00 | 59.03 | |
| Cash Flows (Interest) | 12.00 | 0.1240 | 400.00 | 49.60 | |
| Cash Flows (Interest) | 13.00 | 0.1042 | 400.00 | 41.68 | |
| Cash Flows (Interest) | 14.00 | 0.0876 | 400.00 | 35.03 | |
| Cash Flows (Interest) | 15.00 | 0.0736 | 400.00 | 29.43 | |
| Cash flows (Maturity Amount) | 15.00 | 0.0736 | 2,000.00 | 147.20 | |
| Intrinsic Value of Bond or Current Bond Price | 2,097.55 | ||||
| Value of bond is RM2097.55 | |||||
| Statement showing Price or Intrinsic Value ( since there is annual payment so coupon payment is 400, yield is 10% and number of years= 15) | |||||
| Particulars | Time | PVf @10% | Amount | PV | |
| Cash Flows (Interest) | 1.00 | 0.9091 | 400.00 | 363.64 | |
| Cash Flows (Interest) | 2.00 | 0.8264 | 400.00 | 330.58 | |
| Cash Flows (Interest) | 3.00 | 0.7513 | 400.00 | 300.53 | |
| Cash Flows (Interest) | 4.00 | 0.6830 | 400.00 | 273.21 | |
| Cash Flows (Interest) | 5.00 | 0.6209 | 400.00 | 248.37 | |
| Cash Flows (Interest) | 6.00 | 0.5645 | 400.00 | 225.79 | |
| Cash Flows (Interest) | 7.00 | 0.5132 | 400.00 | 205.26 | |
| Cash Flows (Interest) | 8.00 | 0.4665 | 400.00 | 186.60 | |
| Cash Flows (Interest) | 9.00 | 0.4241 | 400.00 | 169.64 | |
| Cash Flows (Interest) | 10.00 | 0.3855 | 400.00 | 154.22 | |
| Cash Flows (Interest) | 11.00 | 0.3505 | 400.00 | 140.20 | |
| Cash Flows (Interest) | 12.00 | 0.3186 | 400.00 | 127.45 | |
| Cash Flows (Interest) | 13.00 | 0.2897 | 400.00 | 115.87 | |
| Cash Flows (Interest) | 14.00 | 0.2633 | 400.00 | 105.33 | |
| Cash Flows (Interest) | 15.00 | 0.2394 | 400.00 | 95.76 | |
| Cash flows (Maturity Amount) | 15.00 | 0.2394 | 2,000.00 | 478.80 | |
| Intrinsic Value of Bond or Current Bond Price | 3,521.23 | ||||
| Value of bond is RM3521.23 | |||||
ekkarill92 answered 1 year agoRelated Solutions
Thomas Sdn Bhd is a computer manufacturer. The summarised accounts of Thomas Sdn Bhd for the...
Thomas Sdn Bhd is a computer manufacturer. The summarised
accounts of Thomas Sdn Bhd for the years 2019 and 2020 are given
below.
Thomas Sdn Bhd
Income Statement for the Year Ended 31 December
2019
2020
RM’000
RM’000
Sales
200
280
Cost of goods sold
(150)
(210)
Gross profit
50
70
Administrative and selling expenses
(38)
(46)
Interest expenses
-0-
(4)
Net income
12
20
Thomas Sdn Bhd
Statement of Financial Position as at 31 December
2019
2020
RM’000
RM’000...
The owners of ASPRO Sdn Bhd and ASPIA Sdn Bhd decided to combine their business in...
The owners of ASPRO Sdn Bhd and ASPIA Sdn Bhd decided to
combine their business in which a new company named ASPRO ASPIA Bhd
was formed to take over the businesses of both companies from 1
January 2020. Below are their balance of accounts as at 31 December
2019.
Balance of accounts as at 31 December 2019
ASPRO
(RM)
ASPIA
(RM)
Property, plant and equipment
400,000
600,000
Investment property
200,000
100,000
Cash
40,000
10,000
Trade receivables
100,000
60,000
Inventories
60,000...
(Bond valuation ) You own a bond that pays $120 in annual interest, with a $1,000...
(Bond valuation ) You own a bond that pays $120 in annual
interest, with a $1,000 par value. It matures in 10 years. Your
required rate of return is 11 percent. a. Calculate the value of
the bond. b. How does the value change if your required rate of
return (1) increases to 14 percent or (2) decreases to 7 percent?
c. Explain the implications of your answers in part (b ) as they
relate to interest rate risk, premium...
(Bond valuation relationships) You own a bond that pays $ 110 in annual interest, with a...
(Bond valuation relationships) You own a bond that pays $ 110
in annual interest, with a $1,000 par value. It matures in 10
years. The market's required yield to maturity on a
comparable-risk bond is 10 percent.
a. What is the value of the bond if the
market's required yield to maturity on a comparable-risk bond is
10 percent?
(Round to the nearest cent.)
b. (i) What is the value of
the bond if the yield to maturity on a...
Jun owns a bond with a 4% coupon that pays interest annually. It trades at 114%...
Jun owns a bond with a 4% coupon that pays interest annually. It
trades at 114% and matures in 14 years.
a. What is its yield to maturity?
b. If its interest was paid semi-annually, what
would be its yield to maturity?
c. Would you prefer to be paid the annual 4% coupon
compound annually or semi-annually?
(Bond valuation) You own a bond that pays $120in annual interest, with a $1,000 par...
(Bond valuation) You own a bond that pays $120
in annual interest, with a $1,000 par value. It matures in 10
years. Your required rate of return is 11 percent.a. Calculate the value of the bond.b. How does the value change if your required rate of return (1)
increases to 15 percent or (2) decreases to 6 percent?c. Explain the implications of your answers in part (b) as they
relate to interest rate risk, premium bonds, and discount
bonds.d. Assume...
(Bond valuation relationships) A bond of Telink Corporation pays $120 in annual interest, with a $1,000...
(Bond valuation relationships) A bond of Telink Corporation
pays $120 in annual interest, with a $1,000 par value. The bonds
mature in 25 years. The market's required yield to maturity on a
comparable-risk bond is 8 percent.
a. Calculate the value of the bond.
b. How does the value change if the market's required yield to
maturity on a comparable-risk bond (i) increases to
13 percent or (ii) decreases to 4 percent?
c. Interpret your findings in parts a and...
(Bond valuation relationships) You own a bond that pays $120 in annual interest, with a $1,000...
(Bond valuation relationships) You own a bond that pays
$120 in annual interest, with a $1,000 par value. It matures in
20 years. The market's required yield to maturity on a
comparable-risk bond is 11 percent.
a. Calculate the value of the bond.
b. How does the value change if the yield to maturity on a
comparable-risk bond (i) increases to 16 percent or (ii)
decreases to 8 percent?
c. Explain the implications of your answers in part b as...
(Bond valuation) You own a bond that pays $120 in annual interest, with a $1,000 par...
(Bond valuation) You own a bond that pays $120 in annual interest,
with a $1,000 par value. It matures in 15 years. Your requires rate
of return is 10 percent.
a. Calculate the value of the bond.
b. How does the value change if your required rate of return
(1) increases to 16 percent or (2) decreases to 8 percent?
c. Explain the implications of your answers in part (b) as
they relate to interest rate risk, premium bonds, and...
(Bond valuation relationships) You own a bond that pays $100 in annual interest, with a $1000...
(Bond valuation relationships) You own a bond that pays $100
in annual interest, with a $1000 par value. It matures in 15 years.
The market's required yield to maturity on a comparable-risk bond
is 12 percent. a. Calculate the value of the bond. b. How does
the value change if the yield to maturity on a comparable-risk bond
(i) increases to 15 percent or (ii) decreases to 8 percent?
c. Explain the implications of your answers in part b as...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- Question: what is the difference between rights of assertion and observation assertion. Include which financial statements...
- how to read a csv file in php and make a html table? I can't use...
- ABC Inc. is evaluating a project that will increase annual sales by $230,000 and annual cash...
- Identify the behavior, values, and consumption patterns from people in New York City versus Milan Italy.
- A stock has a required return of 10%, the risk-free rate is 4.5%, and the market...
- How do the media options available to advertisers vary in different parts of the world? (Choose...
- Charming Paper Company sells to the 12 accounts listed here. Account Receivable Balance Outstanding Average...
ADVERTISEMENT