Question Tag: Bond Valuation

Search 500 + past questions and counting.

  • Filter by Professional Bodies

  • Filter by Subject

  • Filter by Series

  • Filter by Topics

  • Filter by Levels

  • 20 Marks

FM – May 2024 – L3 – SB – Q4 – Investment Appraisal Techniques

Analyze forward rates and bond valuation, calculate bond prices and YTM, evaluate price changes over time, and interpret modified duration.

The following information is on 3 default-free bonds.

Bonds Price (₦) Coupon (%) Redemption Value (₦) Maturity (Years)
A 105 10 100 1
B 96 4 100 2
C 98 6 100 3

Required:

a. Estimate the two-year forward rate at the end of year 1 and the one-year forward rate at the end of year 2.
(5 Marks)

b. You are considering buying a three-year 9% annual-coupon paying bond with a face value of ₦1,000. The bond is default-free.

i. Calculate the price of the bond and its yield to maturity. Clearly explain why you may not realize the calculated yield.
(6 Marks)

ii. One year after purchasing the bond at the price you have calculated, if there are no changes in market interest rates, do you expect the price of the bond to increase, fall, or remain constant? Explain.
(2 Marks)

iii. Estimate and interpret the modified duration of the bond. Identify the key limitations of modified duration in bond analysis.
(7 Marks)

(Total 20 Marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – May 2024 – L3 – SB – Q4 – Investment Appraisal Techniques"

  • 20 Marks

FM – May 2018 – L3 – SB – Q2 – Investment Appraisal Techniques

Evaluate two corporate bonds for investment based on price, yield to maturity, and duration.

Kazaure Limited has a cash surplus of N20m, which the financial manager is keen to invest in corporate bonds. He has identified two potential investment opportunities in two different companies which are both rated A by the major credit rating agencies.

Bond A: The issuer plans to raise an N500m 2-year bond with a coupon rate of 10%. The bond is redeemable at a premium of 8% to nominal value.

Bond B: The issuer plans to raise an N800m 3-year bond with a coupon rate of 12% and redeemable at par.

The annual spot yield curve for government bonds is:

Term Spot Yield
1-Year 9.50%
2-Year 10.40%
3-Year 10.50%

Extract from a major credit rating agency’s website:

Rating 1-Year Spread 2-Year Spread 3-Year Spread
AAA 6 16 28
AA 15 25 40
A 20 30 50

Required:

a. For a nominal value of N1,000, calculate the theoretical issue prices of the two bonds and indicate how many of each of the bonds Kazaure Limited can buy, assuming it invests in only one of them. (5 Marks)
Note: Calculate issue prices to the nearest Naira.

b. Irrespective of your answer in (a), assume Bond A is issued at ₦1,054 and Bond B is issued at N1,026. Calculate the yield to maturity of each bond at the time of issue. (5 Marks)

c. Calculate the duration of each bond. What does duration measure? (6 Marks)

d. If you expect interest rates to increase in the market, which of the two bonds, A or B, would you like to buy and why? (4 Marks)
Note: No calculation is required.

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – May 2018 – L3 – SB – Q2 – Investment Appraisal Techniques"

  • 4 Marks

CR – Nov 2017 – L3 – Q2e – 17 Financial instruments: Recognition and measurement Corporate reporting

Advise on the accounting treatment for an investment bond not held to maturity under IFRS 9.

DanKay Ltd bought a ten-year bond on 1 August 2016 at a cost of GH¢45 million. The bond carries an interest coupon of GH¢5 million paid annually in arrears, and its effective yield to maturity was 12% at the date of purchase. DanKay Ltd is holding the bond as a speculative investment, expecting its value to increase, and hopes to sell the bond at a profit in the short to medium term. On 31 July 2017, its reporting date, the fair value of the bond had declined to GH¢43 million. The interest payment was received as scheduled.

Required:
Advise DanKay Ltd on the treatment of the above in the financial statements for the year ended 31 July 2017 in accordance with IFRS 9: Financial Instruments.

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "CR – Nov 2017 – L3 – Q2e – 17 Financial instruments: Recognition and measurement Corporate reporting"

  • 6 Marks

FM – Nov 2019 – L2 – Q3b – Sources of finance: debt

Calculate the even amount to be deposited into a sinking fund to redeem bonds at maturity.

Wobete Ltd is offering 5 million units of 15-year bonds with a face value of GH¢100 each. Though the bonds are being offered at a price of GH¢95 each, the bonds will be redeemed at a premium of 10%. The annual coupon rate of the bonds is 15%. Interest is payable at the end of every six months.

A provision in the bond indenture requires that Wobete Ltd establishes a sinking fund to accumulate enough money to pay the total redemption value of the bonds upon maturity. To comply with this provision, Wobete Ltd plans to set aside an even amount at the end of each quarter over the next 15 years. Each of the even amounts that will be set aside will be invested at an annual interest rate of 12% with quarterly compounding.

Required:
Calculate the even amount that should be put into the sinking fund at the end of each quarter to raise enough money to pay the total redemption value of the bonds. (6 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – Nov 2019 – L2 – Q3b – Sources of finance: debt"

  • 15 Marks

FM – NOV 2018 – L2 – Q5 – Business valuations

Involves calculating a range of valuations for an unquoted company using earnings and P/E ratios, and calculating the market value of bonds based on the cost of debt

a) Flue Ltd wishes to make a takeover bid for the shares of Donc Ltd, an unquoted company. The earnings of Donc Ltd over the past five years have been as follows:

Year Earnings (GH¢)
2013 40,000
2014 57,600
2015 54,400
2016 56,800
2017 60,000

The average P/E ratio of quoted companies in the industry in which Donc Ltd operates is 10. Quoted companies that are similar in many respects to Donc Ltd are:

  • Beans Ltd has a P/E ratio of 15 but is a company with very good growth prospects.
  • Wash Ltd has had a poor profit record for several years and has a P/E ratio of 7.

Required:

Calculate a suitable range of valuations for the shares of Donc Ltd.
(9 marks)

b) Food Ltd has in issue 12% bonds with a par value of GH¢150,000 and a redemption value of GH¢165,000, with interest payable quarterly. The cost of debt on the bonds is 8% annually and 2% quarterly. The bonds are redeemable on 30 June 2021, and it is now 31 December 2017.

Required:

Calculate the market value of the bonds.
(6 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – NOV 2018 – L2 – Q5 – Business valuations"

  • 20 Marks

FM – May 2024 – L3 – SB – Q4 – Investment Appraisal Techniques

Analyze forward rates and bond valuation, calculate bond prices and YTM, evaluate price changes over time, and interpret modified duration.

The following information is on 3 default-free bonds.

Bonds Price (₦) Coupon (%) Redemption Value (₦) Maturity (Years)
A 105 10 100 1
B 96 4 100 2
C 98 6 100 3

Required:

a. Estimate the two-year forward rate at the end of year 1 and the one-year forward rate at the end of year 2.
(5 Marks)

b. You are considering buying a three-year 9% annual-coupon paying bond with a face value of ₦1,000. The bond is default-free.

i. Calculate the price of the bond and its yield to maturity. Clearly explain why you may not realize the calculated yield.
(6 Marks)

ii. One year after purchasing the bond at the price you have calculated, if there are no changes in market interest rates, do you expect the price of the bond to increase, fall, or remain constant? Explain.
(2 Marks)

iii. Estimate and interpret the modified duration of the bond. Identify the key limitations of modified duration in bond analysis.
(7 Marks)

(Total 20 Marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – May 2024 – L3 – SB – Q4 – Investment Appraisal Techniques"

  • 20 Marks

FM – May 2018 – L3 – SB – Q2 – Investment Appraisal Techniques

Evaluate two corporate bonds for investment based on price, yield to maturity, and duration.

Kazaure Limited has a cash surplus of N20m, which the financial manager is keen to invest in corporate bonds. He has identified two potential investment opportunities in two different companies which are both rated A by the major credit rating agencies.

Bond A: The issuer plans to raise an N500m 2-year bond with a coupon rate of 10%. The bond is redeemable at a premium of 8% to nominal value.

Bond B: The issuer plans to raise an N800m 3-year bond with a coupon rate of 12% and redeemable at par.

The annual spot yield curve for government bonds is:

Term Spot Yield
1-Year 9.50%
2-Year 10.40%
3-Year 10.50%

Extract from a major credit rating agency’s website:

Rating 1-Year Spread 2-Year Spread 3-Year Spread
AAA 6 16 28
AA 15 25 40
A 20 30 50

Required:

a. For a nominal value of N1,000, calculate the theoretical issue prices of the two bonds and indicate how many of each of the bonds Kazaure Limited can buy, assuming it invests in only one of them. (5 Marks)
Note: Calculate issue prices to the nearest Naira.

b. Irrespective of your answer in (a), assume Bond A is issued at ₦1,054 and Bond B is issued at N1,026. Calculate the yield to maturity of each bond at the time of issue. (5 Marks)

c. Calculate the duration of each bond. What does duration measure? (6 Marks)

d. If you expect interest rates to increase in the market, which of the two bonds, A or B, would you like to buy and why? (4 Marks)
Note: No calculation is required.

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – May 2018 – L3 – SB – Q2 – Investment Appraisal Techniques"

  • 4 Marks

CR – Nov 2017 – L3 – Q2e – 17 Financial instruments: Recognition and measurement Corporate reporting

Advise on the accounting treatment for an investment bond not held to maturity under IFRS 9.

DanKay Ltd bought a ten-year bond on 1 August 2016 at a cost of GH¢45 million. The bond carries an interest coupon of GH¢5 million paid annually in arrears, and its effective yield to maturity was 12% at the date of purchase. DanKay Ltd is holding the bond as a speculative investment, expecting its value to increase, and hopes to sell the bond at a profit in the short to medium term. On 31 July 2017, its reporting date, the fair value of the bond had declined to GH¢43 million. The interest payment was received as scheduled.

Required:
Advise DanKay Ltd on the treatment of the above in the financial statements for the year ended 31 July 2017 in accordance with IFRS 9: Financial Instruments.

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "CR – Nov 2017 – L3 – Q2e – 17 Financial instruments: Recognition and measurement Corporate reporting"

  • 6 Marks

FM – Nov 2019 – L2 – Q3b – Sources of finance: debt

Calculate the even amount to be deposited into a sinking fund to redeem bonds at maturity.

Wobete Ltd is offering 5 million units of 15-year bonds with a face value of GH¢100 each. Though the bonds are being offered at a price of GH¢95 each, the bonds will be redeemed at a premium of 10%. The annual coupon rate of the bonds is 15%. Interest is payable at the end of every six months.

A provision in the bond indenture requires that Wobete Ltd establishes a sinking fund to accumulate enough money to pay the total redemption value of the bonds upon maturity. To comply with this provision, Wobete Ltd plans to set aside an even amount at the end of each quarter over the next 15 years. Each of the even amounts that will be set aside will be invested at an annual interest rate of 12% with quarterly compounding.

Required:
Calculate the even amount that should be put into the sinking fund at the end of each quarter to raise enough money to pay the total redemption value of the bonds. (6 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – Nov 2019 – L2 – Q3b – Sources of finance: debt"

  • 15 Marks

FM – NOV 2018 – L2 – Q5 – Business valuations

Involves calculating a range of valuations for an unquoted company using earnings and P/E ratios, and calculating the market value of bonds based on the cost of debt

a) Flue Ltd wishes to make a takeover bid for the shares of Donc Ltd, an unquoted company. The earnings of Donc Ltd over the past five years have been as follows:

Year Earnings (GH¢)
2013 40,000
2014 57,600
2015 54,400
2016 56,800
2017 60,000

The average P/E ratio of quoted companies in the industry in which Donc Ltd operates is 10. Quoted companies that are similar in many respects to Donc Ltd are:

  • Beans Ltd has a P/E ratio of 15 but is a company with very good growth prospects.
  • Wash Ltd has had a poor profit record for several years and has a P/E ratio of 7.

Required:

Calculate a suitable range of valuations for the shares of Donc Ltd.
(9 marks)

b) Food Ltd has in issue 12% bonds with a par value of GH¢150,000 and a redemption value of GH¢165,000, with interest payable quarterly. The cost of debt on the bonds is 8% annually and 2% quarterly. The bonds are redeemable on 30 June 2021, and it is now 31 December 2017.

Required:

Calculate the market value of the bonds.
(6 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – NOV 2018 – L2 – Q5 – Business valuations"

Elevate your professional expertise across key business domains with our comprehensive training programs

Our offerings

Contact Info

  • +233203701923
    +233543919232
  • info@nbcinstitute.com

Customer

Get In Touch

Follow us on our social media and get daily updates.

Facebook-f Twitter Linkedin-in Envelope
error: Content is protected !!
Oops!

This feature is only available in selected plans.

Click here to view all plans

Click on the login button below to login if you’re already subscribed to a plan or click on the upgrade button below to upgrade your current plan.

Login
Upgrade Plan

If you’re not subscribed to a plan, click on the button below to choose a plan

Subscribe to a plan