Downloaded from www.ashishlalaji.net
Pinnacle Academy
Solutions of Tests of
April 2015 Batch
201-202, Florence Classic, Besides Unnati Vidhyalay,
Jain Derasar Road, Ashapuri Society, Akota, Vadodara-20. ph: 98258 561 55
Solution of Test of
Money Market Instruments &
Bonds: Valuation & Analysis
[SFM – CA Final]
Conducted on 27th July 2015
[Solution is at the end with marking for self-assessment]
Time Allowed-1 hour
Q1
(a)
Maximum Marks- 30
The face value of a bond is Rs.100 and is currently quoted at a premium of 5%. It
has a maturity period of 5 years during which it shall pay interest at 10%, 11%, 12%,
13% and 14% each year respectively and shall be redeemed at 5% discount. The
prevailing market interest rate is 10%. Calculate yield to maturity and decide whether
the bond is worth purchasing.
(7 Marks)
(b)
Suppose, Mr. X purchases T-Bill for Rs.9,940 maturing in 91 days for Rs.10,000.
What would be the annualized investment rate for Mr. X (365 days)?
(2 Marks)
(c)
Suppose government pays Rs.5,000 on maturity for 91 days T-Bill. If Mr. Y is
desirous to earn an annualized return of 3.5% (360 days), then how much should he
pay?
(3 Marks)
Q2
(a)
A bond has a face value of Rs.100 paying interest at 9 % and redeemable at par
after 3 years from now. The current yield is 8 %. Calculate duration of the given bond
at (i) current yield, (ii) 9 % and (iii) 7 %. What relationship do you establish between
yield and duration?
(8 Marks)
1
Downloaded from www.ashishlalaji.net
(b)
Several years ago PTPC issued bonds having face value of Rs.1,000 at par at an
YTM of 7 %. Now, 8 years are left and the YTM has increased to 15%. What is the
current price of the bonds of PTPC? Say, an investor buys the bond at current MPS.
At the time of redemption PTPC goes broke and can pay only 80% of its face value.
What is the YTM for the investor?
(6 Marks)
(c)
A bond having 30 years to maturity and paying coupons of 8% p.a. is callable in 5
years at a call price of Rs.1100. The current YTM is 7%. What is the YTC?
(4 Marks)
th
(Assessed answer papers shall be returned latest by 8 August 2015)
2
Downloaded from www.ashishlalaji.net
Solution of Test of Money Market Instruments &
Bonds: Valuation & Analysis
Conducted on 27th July 2015
Q1
(a)
Calculation of Yield to Maturity (YTM):
Year
1
2
3
4
5
Cash
Inflows
10
11
12
13
109
PV
PVF (10%) (10%)
0.909
9.09
0.826
9.09
0.751
9.02
0.683
8.88
0.621
67.68
Σ PVCI 103.76
Σ PVCO 105.00
NPV
-1.24
PVF
(5%) PV (5%)
0.952
9.52
0.907
9.98
0.864
10.37
0.823
10.70
0.784
85.40
Σ PVCI 125.97
Σ PVCO 105.00
NPV 20.97
YTM = 5% + [20.97 / 20.97 – (-1.24)] X 5 = 9.72%
As the YTM is lower than the current prevailing market interest rate of 10%, the bond
is not worth buying.
(7 Marks)
(b)
Annualised return from T-Bill = 10,000 – 9,940 / 9,940 X 365 / 91 X 100 = 2.42%
(2 Marks)
(c)
Amount to be paid = 5,000 / 1 + (0.035 X 91 / 360 = Rs.4,956.63
(3 Marks)
Q2
(a)
Calculation of Duration at different probable yields:
Year
Cash
Inflow
PVF
(8%)
1
2
3
9
9
109
.926
.857
.794
Duration when yield
Duration when yield
Duration when yield
PV
(8%)
Year
PVF
PV
Year
PVF
PV
Year
X PV (9%) (9%)
X PV (7%) (7%)
X PV
(8%)
(9%)
(7%)
8.33
8.33
.917 8.25
8.25
.935
8.42
8.42
7.71 15.42 .842 7.58
15.16 .873
7.86
15.71
86.55 259.65 .772 84.15 252.45 .816
88.94 266.83
102.59 283.40
99.98 275.86
105.22 290.96
is 8 % = 2.762 years
is 9 % = 2.759 years
is 7 % = 2.765 years
Conclusion: Duration decreases as yield increases and vice versa.
(8 Marks)
(b)
Calculation of Current Bond Price:
Year
Cash
PVF
PV
Inflows (15%)
1–8
70
4.487 314.09
8
1,000
0.327 327.00
641.09
3
Downloaded from www.ashishlalaji.net
Note: Coupon rate of interest of the bond is not given. But the bond is issued at par
and hence YTM and rate of interest have to be equal. Hence, coupon rate is 7%.
Calculation of YTM:
YTM = 70 + [800 – 641.09] / 8 / ½ [800 + 641.09] = 12.47 %
(6 Marks)
(c)
Calculation of Current Bond Price:
Year
Cash
PVF
Inflows (7%)
1 – 30
80
12.409
30
1,000
0.131
PV
992.72
131.00
1,123.72
Note: Face value of the bond is assumed to be of Rs.1,000.
Calculation of YTC:
YTC = 80 + [1100 – 1123.72] / 5 / ½ [1100 + 1123.72] = 6.77 %
(4 Marks)
Solution prepared by
CA. Ashish Lalaji
4