Fundamentals of Financial Management, Third Edition

SOLVED NUMERICAL PROBLEMS

1. A company issues a 3-year zero-coupon bond with a face value of Rs 1,00,000. It is assumed that interest accrues twice a year. The investors wish to have a 5% return on investment. Find the issue value of the bond.

   Solution

   Effective interest rate = {1 + (0.05/2)²} − 1 = 0.050625 = 5.0625%

   Issue value = Rs 1,00,000 / (1+ 0.050625)³ = Rs 86,229.19

    

2. If a zero-coupon bond with a 5-year maturity is issued at Rs 13,611.66 and the investors’ required rate of return is 8%, find the face value of the bond.

   Solution

   Rs 13,611.66 (1.08)⁵ = Rs 20,000

    

3. A company issues a 5% Rs 1,00,000 bond with a 3-year maturity. The investors’ required rate of return is 8%. Find the investors’ intrinsic value of the bond if: (a) interest is ...