Chapter 6 Chapter 6

13
(Rs.1,000)
Bond B
(Rs.1,000)
Preference shares C
(Rs.100)
Preference shares D
(Rs.100)
10 10 5 12
100 11 * 13*
100 12 * 13*
*Likelihood of being called at a premium over par.
Compute the current value of the portfolio.
Answer
In the absence of information regarding early call, this point has been ignored.
Preference shares have been assumed to be irredeemable.
Value of portfolio:
Security Value per security Total
Value
Bond A [90/(1.12)]+[90/(1.12) 2 ]+[1090/(1.12) 3 ] = 928 9,280
Bond B [100/(1.12)]+[100/(1.12) 2 ]+….[1100/(1.12) 5 ] =928 9.280
PS C [11/(1.13)]+[11/(1.13) 2 ]+……= 84.60 8,460
PS D [12/(1.13)]+[12/(1.13) 2 ]+……= 92.30 9,230
Total 36,250
YIELD CURVE
An yield curve is a graphic representation of term structure of returns on bonds.
It is a graphic representation of yields ( at a particular point of time) on similar
quality fixed income instruments plotted against various maturities i.e. the curve
exhibits yields currently available on similar type of bonds of different maturities.
For drawing the yield curve, yields of comparable securities, at a particular point of
time, are plotted on Y-axis and their maturities (time till redemption) are plotted on
X-axis.
With the help of yield curve, an investor can easily find the yields that are available
on the comparable fixed income securities for short –period, medium-period and
long-period. For example, the securities of Government of India are the fixed income
instruments of similar quality. If we find the yields on such securities with 1, 2, 3, 4
and 5 years maturities and plot such yields against their maturities, the resultant
chart is an yield curve