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 | |||||
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