Chapter 6 Chapter 6

17
Suppose you are interested in purchasing a 6% Bond of Rs.1000, maturity 3 years,
what should be the price.
Answer
Price of the bond =
[60/(1.07) + 60/{(1.07)(1.08)} + 1060/{1.07)(1.08)(1.09)}]
= 949.53
Q. No. 26 : From the following data for Government securities, calculate the forward
rates:
Face value
(Rupees)
Interest rate Maturity
year(s)
Current price
(Rupees)
1,00,000 0% 1 91,500
1,00,000 10% 2 98,500
1,00,000 10.50% 3 99,000
(Nov. 2007)
Answer
Year 1: Current interest rate for 1 year (called as spot rate, also called as forward
rate for year 1) = (1,00,000 / 91,500) -1 = 9.29%
Year 2: let forward rate for year 2 = r
98,500 = [{10000/1.0929} +1,10,000/{(1.0929)(1+r)}]
r = 12.63%
Year 3: let the forward rate for year 3 = r
99,000 = [10500/1.0929 + 10,500/{(1.0929)(1.1263)}
+ 1,10,500(1.0929)(1.1263)((1+r)]
r = 11.01%
Q. No. 27 : The YTM of 1-year maturity zero coupon bond is 6% and that of 2-year
maturity zero coupon bond is 7%. If the company issues a 2-year maturity 8%
coupon bond of Rs.1000 face value, what should be appropriate issue price
Answer
Appropriate price = 80/(1.06) + 1080/(1.07) 2 = 1018.79
Alternative way :
Suppose we invest Rs.100 today, it will grow to Rs.106 after 1 year.
Suppose we invest Rs.100 today, it will grow to 100(1.07) 2 after 2 years.
Forward rate for year 1 = 6%
Forward rate for year 2 = [100(1.07) 2 / 1.06 ] – 1 = 8.009%
Appropriate price = 80/(1.06) + 1080/{(1.06)(1.08009)} = 1018.79