Question

(16 MAN- QUESTION 4 A RM100 par value bond issued by AT&N with a maturity date o rate of 8.50 percent. AT&N pays interest to bondholders on 15 and July 15. On January 1, 2013, the bond had 20 years le required yield to maturity for a similarly rated debt was 7.5 percent currently selling at RM120.00. V =3 Required: ty date of 2032 and a stated coupon ers on a semi-annual basis on January ears left to maturity. The market's cent per year. The bond is 18:51 0.02 - 40.07) +100 0.075 a) What is the value of the beat S5 il 0..- 67.34 + 2293 (5 marks) = 110.27 (CLO1:PLO2:C1) b) Calculate the bonds required rate of return (TM). (5 marks) (CLOI:PLO2:CI) c) Briefly explain the relationship between interest rate and bond price (2 marks) (CLO1:PLO2:C2) d) Differentiate between callable bond and convertible bond. (4 marks) (CLOT:PLO2:C2)

Answer 1

a)

Function Arguments ? X PV Rate 7.5%/2 Nper 20*2 Pmt 8.5/2 EV 100 Type of 1 1 1 1 = 0.0375 = 40 = 4.25 = 100 = -110.275495 Returns the present value of an investment: the total amount that a series of future payments is worth now. Type is a logical value: payment at the beginning of the period = 1; payment at the end of the period = 0 or omitted. Formula result = -110.28 Help on this function D OK cancel

Hence, Value of bond is 110.28

b)

Function Arguments RATE Pmt Nper 20*2 8.5/2 -120 FV 100 Type o 1 1 1 1 1 = 40 = 4.25 = -120 = 100 = 0 = 0.033369943 Returns the interest rate per period of a loan or an investment. For example, use 6%/4 for quarterly payments at 6% APR. Type is a logical value: payment at the beginning of the period = 1; payment at the end of the period = 0 or omitted. Formula result = 3.34% Help on this function ок | Cancel

Hence, Required rate of return is 6.68% (3.34%*2)

c)
Interest rate and bond prices have inverse relationship. If interest rate increase, bond price will decrease and vice-versa.
d)
Callable bond is called and paid cash when bond is called. When bond is called at call price. Convertible bond is converted into stocks but cash is not paid except for fraction of shares that left.

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