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# Mgt201 2nd GDB solution and discussion last date 28-11-2012

Bond Valuation and Yield on Bond

Learning Objective:

To understand the application of bond valuation for investment decisions.

Learning Outcome:

After attempting this GDB, the students would be able to understand the application of bond valuation for investment decisions.

The Case:

Suppose, you are working as an investment consultant in a consultancy firm and most of your clients are habitual investors, who are maintaining their own portfolios comprising of various combinations of stocks and bonds.

Mr. Zahid, a habitual investor comes to you for consulting about adding one more potential investing option to his existing portfolio. Currently, as per your analysis, there are two bonds available in the market with the following data:

 Bond A Bond B Maturity 3 years 8 years Coupon payment 10% Annual 10% Semiannual Yield 6.23% 9.8%

*Note: Interest rate fluctuations are high in the market

Required:

• Suggest Mr. Zahid, who is interested to add only one bond to his portfolio about the suitable bond for his portfolio.
• Support your choice by elaborating the reason on which the suggested bond is considered as a preferred option.

Views: 3000

### Replies to This Discussion

Our main purpose here discussion not just Solution

Technical Question....

ok

ideaaaaaaaa koi to day

Dear friends, if we consider the face value of both the bonds Rs. 1000. Then apparently it seems that investment in bond B will be better. Rest i can better comment after detailed calculations. Anybody who has different opinion can share immediately, so that we can arrive at correct solution by fruitful discussion

Lo gee solution a gaya. Ab reasoning apni apni. Bond B will be more suitable for investment. Keep the aspects of  Long Bond - Risk Theory (Handout page 68) Bond Portfolio Theory and Bond Maturity (Life) Tradeoff in mind while giving reasons. Best of luck. If my point of view is not correct, the God Bless U Allllll. Chapa dhondo.

thx

I think, Bond A is better. Keeping in mind the following points:

Maturity: Shorter maturities have less risk, so their interest rates don't have to be as high as long-term maturities to attract buyers.
The longer the time to maturity for a bond, the greater the risk that the issuing company will experience financial trouble.

Coupon Payment: A bond with semiannual payments would have a higher price than a bond with annual payments when they both are selling at a premium.

In general, bonds with semiannual payments are more sensitive to changes in market interest rates. For the same amount of decline in market interest rates, bonds with semiannual payments tend to see more price increases.
Hence the one with annual payments is better.

Yield: If you purchase a higher grade, lower yield bond, you are exposed to less default risk, and you have a higher chance of getting all of the promised coupon payments and the per value if you hold the bond to maturity.

bhai sub ko bolain aik e jaga discussion kya karain 2 2 post nai

Bond valuation is the act of evaluating certain aspects of a bond such as the interest rate, possible yield, and maturity date to determine the fair value of the security.
Now the discussion is open for you people, try to solve this GDB through discussion.

 Post: #1 GDB IDEA MGT 201  1 shorter maturities have low risk so there interest rate rate hav dnt there long term maturities to attract buyersbcz long term maturities have more risk--------------------------------------------------------------------------------yeild if u purchase ahigher grade, lower yeild bond you exposed to less default risk and u hav achance to getting higher all of the prominced coupon payments--------------------------------------------------------------------------------so in both these case A is betterCOUPAN PAYMENT: A bond with semi annual payments would have higher price then bond A WITH ANNUAL PRICE WHEN THEY BOTH ARE SELLING in general bonds semi annual payments is more sensitive to changes in market interest rate.

thanks tariq bhai

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