Question

1. (a) An investor ‘A’ purchased a bond at price of Rs. 900 with Rs 100 as
Coupon payment and sold it at Rs 1000. What is his holding return?​

Answer 1

Answer:

municipality or government agency generally issues a debt security.

Bond issues are considered fixed income securities because they impose fixed financial

obligations on the issuers. The issuers agrees to

(a) Pay fixed amount of interest periodically to the holder of bond.

(b) Repay a fixed amount of principal at the date of maturity.

4.1.1 Some Basics of Bond

(a) Face Value: This is the value stated on the face of the bond and is also known as par

value. It represents the amount of borrowing by the firm which will be repaid after a

specific period of time.

(b) Redemption value of Bond: The Face value of bond is repaid at the end of maturity

period, is known as redemption value of bond. A bond may be redeemed at par, at

premium or at discount.

(c) Market value: A bond may be traded in a stock exchange. Market value is the price at

which the bond is usually bought or sold. Market value may be different from par value.

(d) Coupon Rate or Interest: A bond carries a specific rate of interest which is also called a

coupon rate.

Interest Amt = Face value of Bond x Coupon Rate

(e) Maturity: It is the number of years after which Redemption value is paid.

(f) Call Date: Bonds which can be redeemed prior to maturity. The call date represents the

date at which the bond can be called.

(g) Call Price: It is a price at which Bond can be called back before maturity.

4.2 Bond Value and Yield to Maturity [From Q-1 to 17]

ICAI ICSI ICWA

Nov-2003 M-8 June-2002 M-6 Dec-2002

Nov-2007 M-6 Dec-2003

Nov-2008 M-5 Dec-2004

Nov-2009 M-4

Nov-2010 M-2.5+2.5

Nov-2010 M-5

Nov-2011 M-8

Nov-2013 M-5

May-2015 M-2+2+2

4.2.1 VALUE OF BOND

(a) Bonds with Maturity B0 = Intt x PVAF(n years, RR) + RV x PVF(nth years, RR)

(b) Perpetual Bond B0 = Intt/RR

(c) Zero Coupon Bond B0 = RV x PVF(nth years, RR)

4.2.2 YIELD TO MATURITY (YTM)

(a) The rate of return which makes the discounted value of cash flows equal to the bond's

market value is known as the YTM of the bond. So, a bond’s YTM may be defined as the IR