PAM 3023 PENGURUSAN

ADLINA BINTI KAMARUDZAMAN

D2014106612
2

KOW MEEI PIN

D2014106609
9

NORFATIYAH BINTI MA'ARUP

D2014106610
3

NUR IRNA FATONAH BINTI MOHD D2013206507

BADRI
7
NURUL NADIA BT ADENAN

D2013206509
4

KEWANGAN
SEMESTER 2 2015/2016
GROUP B
TUGASAN 2: BOND
VALUATION

7.6 (Bond valuation) Bank of america has bonds that pay a 6.5 percent coupon interest rate
and mature in 5 years. If an investor has a 4.3 percent required rate of return, what should
she be willing to pay for the bond? What happens if she pays more or less?
4.50%
0

$65

$65

$65

$65

Coupon rate : C= 6.5%

Annual Coupon : $1000 x 0.065 = $65
Current market rate : i= 4.50%

$285.35 + $802.45 = $ 1087.80

Thus she be willing to pay for the bond is no more than $1087.80.

7.7 (Bond valuation) At the beginning of the year, you bought a $1,000 par value
corporate bond with a 6 percent annual coupon rate and a 10-year maturity date. When

you bought the bond, it had an expected yield to maturity of 8 percent. Today the bond
sells for $1,060.
a. What did you pay for the bond?
Valuation bond =

interest (Present value of interest + Present value of par)

60 (PVIFA 8%,10) + 1000 (PVIF 8%,10)

60 (6.710) + 1000 (0.463)

$ 865.60

b. If you sold the bond at the end of the year, what would be your one-period return on the
investment?
Period return on investment =

Income + (end of period value - initial value)

Initial value
=

60 + (1060-865.60)
865.60

254.40
865.60

0.294 @ 29.40 %

7-8. (Bond valuation) You are examining three bonds with a par value of $1,000 (you
receive $1000 at maturity) and are concerned with that would happen to their market value
if interest rates (or the market discount rate) changed. The three bonds are
Bond A a bond with 3 years left to maturity that has 6 percent annual coupon
interest rate, but the interest is paid semiannually.
Bond B a bond with 7 years left to maturity that has 6 percent annual coupon
interest rate, but the interest is paid semiannually.
Bond C a bond with 20 years left to maturity that has 6 percent annual coupon
interest rate, but the interest is paid semiannually.
What would be the value of these bonds if the market discount rate were
a.
b.
c.
d.

6 percent per year compounded semiannually?

3 percent per year compounded semiannually?
9 percent per year compounded semiannually?
What observations can you make about these results?

Answers:
a. I = $30

n = 6 (3x2)

i = 3% ( 6/2)

Par = $1000

Value of Bond (Vb) = PV of interest + PV of Par

= I (PVIFA 3%,6) + Par (PVIF 3%,6)
= 30 (5.417) + 1000 (0.837)
= 162.51 + 837
= $999.51
: Discount bonds because a bond that is selling is less than a par value
($999.51<$1000).

b. I = $30

n = 14 (7x2)

i = 1.5% ( 3/2)

Par = $1000

Value of Bond (Vb) = PV of interest + PV of Par

= 30/(1.015)1 + 30/(1.015)2 + 30/(1.015)3 +
+ 1000/(1.015)14
= 376.303 + 811.849
= $1188.152
: Premium bonds because a bond that is selling is higher than a par value
($1188.152>1000).
c. I= $30

n = 40 (20x2)

i = 4.5% ( 9/2)

Par = $1000

1-10 years = 211.093

11-20 years = 152.856
= 30/(1.045)1 + 30/(1.045)2 + 30/(1.015)3 +
21-30 years = 98.429
31-40 years = 63.381
+ 1000/(1.045)40
Total = 525.759

Value of Bond (Vb) = PV of interest + PV of Par

= 525.759 + 171.929
= $697.688
: Discount bonds because a bond that is selling is lower than a par
value ($697.688<1000).
d. If the investor willing to face the risk, then the return in higher amount, them can
choose bond B, but if the investor dont face any risk but the return in small
amount can choose bond A or C.

Mini case
Here are data on $1,000 per value bonds issued by Microsoft, GE Capital, and Morgan
Stanley at the year end of 2012. Assume you are thinking about buying these bonds at
January 2013. Answer the following questions:
a) Assuming interest is paid annually, calculate the values of the bonds if you required
rates of return are as follows: Microsoft, 6 percent; GE capital; 8 percent, and
Morgan Stanley, 10 percent; where

Coupon interest rate

Years to maturity

MICROSOFT

GE CAPITAL

MORGAN

5.25%
30

4.25%
10

STANLEY
4.75%
5

b) At the end of 2008, the bonds were selling for the following account
Microsoft
GE capital
Morgan Stanley

$1,100
$1,030
$1,015

What were the expected rates of return for the each bond?
c) How would the value of the bonds change if (1) your required rate of return (r) in 2
percentage points or (2) decreased 2 percentage points?
d) Explain the implications of your answers in the part (b) in terms of interest rate risk,
bonds and discount bonds.
e) Should you buy the bond? Explain.

Answer:
a) Microsoft

n= 30 years

par value= $1,000

coupon interest= 5.25%

r= 6%

Vb= PV of interest + PV of par

= I (PVIFA6%,30) + Par (PVIF6%,30)
= 52.5 (13.765) + 1,000 (0.174)
=$ 889.78

GE capital
n= 10 years

par value= $1,000

coupon interest= 4.25%

r= 8%

Vb= PV of interest + PV of par

= I (PVIFA8%,10) + Par (PVIF8%,10)
= 42.5 (6.710) + 1,000 (0.463)
= $748.18
Morgan Stanley
n= 5 years

par value= $1,000

coupon interest= 4.75%

Vb= PV of interest + PV of par

= I (PVIFA10%,5) + Par (PVIF10%,5)
= 47.5 (3.791) + 1,000 (0.621)
= $ 801.07

b) Microsof

Vb = $1,100

r= 10%

YTM

Par - Price
n

0.6(price) + 0.4 (Par)

30

= 52.5 +

1,000 1,100

X100

0.6(1,100) + 0.4(1,000)
= 4.64%
GE capital
YTM

Vb = $1,030
Par - Price
n

X 100

0.6(price) + 0.4 (Par)

= 42.5 +

1,000 1,030
10

X100

0.6(1,030) + 0.4(1,000)
= 3.88%
Morgan Stanley
YTM

Vb = $1,015
Par - Price
n

X 100

0.6(price) + 0.4 (Par)

= 47.5 + 1,000 1,015

5

X100

0.6(1,015) + 0.4(1,000)
= 4.41%

c) (1) Your required rate of return (rd) in 2 percentage points

Microsoft
When rd= 6%, Vb= $ 889.78

100

Vb= PV of interest + PV of par

= I (PVIFA2%,30) + Par (PVIF2%,30)
= 52.5 (22.396) + 1,000 (0.552)
=$ 1,727.79
When rd= 2%, Vb= $ 1,215.83
GE capital
When rd= 8%, Vb= $ $748.18
Vb= PV of interest + PV of par
= I (PVIFA2%,10) + Par (PVIF2%,10)
= 42.5 (8.983) + 1,000 (0.820)
=$ 1,201.78
When rd= 2%, Vb= $ 1,201.78
Morgan Stanley
When rd= 10%, Vb= $ 801.07
Vb= PV of interest + PV of par
= I (PVIFA2%,5) + Par (PVIF2%,5)
= 47.5 (4.713) + 1,000 (0.906)
= $ 1,129.87
When rd= 2%, Vb= $ 1,201.78
If the rd < I
So, par < Vb
If the rate of return (rd) is change to 2%, the coupon interest rate of Microsoft, GE Capital,
and Morgan Stanley is higher than rd. So, the par value issued by Microsoft, GE Capital,
and Morgan Stanley were smaller than the values of the bonds. In general, whenever the
going interest rate fall below the coupon rate, a fixed-rate bonds price will rise above its
par value, and it is called a premium bond.

c) (2) Your required rate of return (rd) decreased 2 percentage points

The par value issued by Microsoft is smaller than the values of the bonds. In
general, whenever the going interest rate fall below the coupon rate, a fixed-rate
bonds price will rise above its par value, and it is called a premium bond.
However, the par value issued by GE Capital and Morgan Stanley are bigger than
the values of the bonds. Whenever the going interest rate rises below the coupon
rate, a fixed-rate bonds price will fall below its par value, and it is called a
discount bond.
Microsoft
When rd= 6%, Vb= $ 889.78
Vb= PV of interest + PV of par
= I (PVIFA4%,30) + Par (PVIF4%,30)
= 52.5 (17.292) + 1,000 (0.308)
=$ 1,215.83
When rd= 4%, Vb= $ 1,215.83
GE capital
When rd= 8%, Vb= $ $748.18
Vb= PV of interest + PV of par
= I (PVIFA6%,10) + Par (PVIF6%,10)
= 42.5 (7.360) + 1,000 (0.558)
=$ 870.80
When rd= 6%, Vb= $ 870.80
Morgan Stanley
When rd= 10%, Vb= $ 801.07
Vb= PV of interest + PV of par
= I (PVIFA8%,5) + Par (PVIF8%,5)
= 47.5 (3.993) + 1,000 (0.681)
= $ 870.67
When rd= 8%, Vb= $ 870.67
d) From the above calculations we can made a conclusion that there is an inverse
relationship between value of bond and required return of inverstors. The value of
bond decreases with increase in return and increases with in return.

e) As per the value of the bond calculated in part a and market price of bonds given in
part b, all the bonds are overvalued according to required return of investors.
Therefore, we should not buy the stocks.