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Dear John,
Can you please explain how they calculate bond value of 13 % unsecured bond with nominal value of $40 which is redemable at par in ten years
John sice the interest is 5.2 for all ten years.i understand that but since its redeeming at par so in year 10 it should be 105.2 with DF of 0.508. Why the examiner use nominal value of bond in redemption year i.e. 10th year ? Please explain that.
Interest is receivable for 10 years – first in 1 years time and the last in 10 years time.
In addition there is the redemption of 100 in 10 years time.
To put the redemption at 105.2 would be bringing in the interest in 10 years time twice!John i completely understand what you just write above.Interest can be for 9 years of 5.2m and in 10th years it should be 105.2 i.e. redemption at par and interest of 5.2. John this is not what i asked, i wanted to know whay the examiner use nominal value of $40m in redemption year for bond valuation. It should be 100 right, if it is redeeming at par.
Can you please explain that ?
You either calculate the value of $100 nominal by discount the interest on $100 nominal and the redemption at $100, or you calculate the value of the entire debt by discounting the interest on 40M and the redemption at 40M
The first one gives the value of $100 nominal, and to get the total MV you multiply 40M/100.
The second way gives the total MV directly.I calculated MV of bond as
1_9 10
Interest 5.2 5.2
Redemption 100
NCf 5.2 105.2
Kd 7% 6.515 0.508
PV 33.87 53.44
Total MV of bond 87.31/100Please tell where i am wrong and why the examiner has redeemed at 40 m
The 5.2M interest is the interest on $40M.
If you want to use a nominal value of $100 per bond, then the interest is $13 per year and the redemption is $100. (But then you need to multiply the answer by $40M/$100 to get the total market value of the bond)
Alternatively (as the examiner has done, and somewhat faster), take the actual interest on the bond (which is 13% x $40M) and take the actual redemption amount (which is $40M).
What you are doing is taking the interest on $40M and the redemption of $100, which is not logical 🙂
Ok i got ur point if there is no nominal value of $40m given then we assume the redemption at par ie $100 and interest would be 13 % as i have calculated the interest on 40m so redemption will be at nominal value of $40m ? please tell me whether while calculating interest payments for 10 years i have to make columns as 1_9 10
Or
1_10 10I hope that you are not suggesting having 10 columns! It is much quicker to use annuity factors!
It make no difference whatsoever if you have the interest for years 1 to 9, and then redemption plus interest at year 10, or if instead you have the interest for years 1 to 10 and then just the redemption in year 10. The answer will be exactly the same.
Yes i worked out both ways and the answer was same thanks john u r a life saver ?
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