Ravi Rao is the Chief Executive Officer of Capmart Limited, an investment advisory firm. Ravi Rao has been requested to give a seminar to a group of finance executives drawn from state run universities. He has been requested to explain the basic concepts and tools useful in bond analysis. Ravi Rao has asked you to help him to make his presentation. In particular, you have to answer the following questions.
How is the value of a bond calculated?
What is the value of a 9-year, Rs 1,000 par value bond with a 10 percent annual coupon, if its required rate of return is 8 percent?
What is the value of the bond described in part (b) if it pays interest semi-annually, other things being equal?
What is the YTM of a 6-year, Rs 1,000 par value bond with a 10 percent annual coupon, if it sells for Rs 1,050?
What is the YTM of the bond described in part (d) if the approximate formula is used?
What is the yield to call of the bond described in part (d)if the bond can be called after 3 years at a premium of Rs 50?
What is the realized yield to maturity of the bond described in part (d) if the reinvestment rate applicable to the future cash flows from the bond is 8 percent?
The holders of the bond described in part (d) expect that the bond will pay interest as promised, but on maturity bondholders will receive only 90 percent of par value. What will be difference between the expected YTM and stated YTM? Use the approximate YTM formula.
What is the difference between the annual percentage rate and the effective annual yield?
What is the difference between interest rate risk and reinvestment risk?
List the key financial ratios that have a bearing on debt rating.
What is a yield curve?
What factors determine interest rates?