a) Astra Group has an issue of RM1,000 par value bonds with a 14 percent annual coupon interest rate. The issue has ten years remaining to the maturity date. Bonds of similar risks are currently selling to yield a 12 percent rate of return. What is the current value of each Astra bond?

b) Information relating to bond L, M and N are as follows:-

Bond	Par Value($)	Annual Coupon Interest Rate (%)	Years to Maturity	Required Return (%)
L	1000	9	5	6
M	100	10	8	10
N	500	18	17	15

 (i) Calculate the current value of L.

(ii) What will happen to value/price as the bond approaches maturity?

(iii) Explain if bond sells at discount, premium and par. Give example.

                                                                                                           

Question a= 1113.00

Step-by-step explanation

Question a

Current value of a bond=C*(1-(1+r)^-n/r) + F/(1+r)ⁿ

where, C is the annual coupon=0.14*1000=140

r is the rate of return=0.12

n is the period to maturity

F is the par value of the bond

Therefore, value=140*(1-(1+0.12)^-10/0.12) + 1000/(1+0.12)¹⁰

=791.03+321.97

=1113.00

Question b

i. Current value of L

C is the annual coupon=0.09*1000=90

r is the rate of return=0.06

n is the period to maturity=5

F is the par value of the bond=1000

Value=90*(1-(1+0.06)^-5/0.06) + 1000/(1+0.06)⁵

=379.11+747.26

=1126.37

ii. The par value is equal to the price of the bond when it is first issued. However, this changes as it nears maturity. The price of a bond normally increases as maturity is approached.

iii. If a bond sells at par, its price is equal to the par value and there are no premiums or discounts associated with the sale of the bond. The coupon rate is equal to the required rate of return in the market, For example, in the question, bond M sells at par because both rates are 10%. If it sells at a discount, the price of the bond is less than the par value. This is because the coupon interest rate on the bond is lower than the market rate. For example, if the coupon interest rate is 10% and the market rate of return is 15%, the bond is selling at a discount. If the bond sells at a premium, the bond price is greater than the par value because the bond has a higher coupon rate than the current market rate. Bond L is an example of a bond selling at premium.