ANALYSIS AND VALUATION OF FIXED INCOME SECURITIES

FIN376

QUESTION 1

  1. Listed are several cases related to bond investment.
          CASE 1Mimi recently inherited some bonds (face value RM100,000) from her father, and soon thereafter she became engaged to Mamat, a Universiti Teknologi MARA, investment graduate.   Mamat wants Mimi to cash in the bonds, so the two of them can use the money for two years in Monte Carlo. The 2 percent annual coupon bonds mature on January 1, 2041, and it is now January 1, 2021. Interest on these bonds is paid annually and new annual coupon bonds with similar risk and maturity are currently yielding 12 percent.   If Mimi sells her bonds today and puts the proceeds into an account which pays 10 percent compounded annually, what would be the equal annual amounts she could withdraw from the account in the said 2 years’ time (2 equal annuity withdrawal amount).
      CASE 2En. Ali is the owner of 100 bonds issued by ABC Bhd. These bonds have 8 years remaining to maturity, an annual coupon payment of RM80, and a par value of RM1,000. He purchased the bond 2 years ago when the interest rate was 8.5 percent. Due to the pandemic, the interest rate has fallen by 1.7 percent from it was 2 years ago. Considering this, En Ali decided not to hold the bonds till maturity but to sell it today. Help him to compute his total capital gain from this investment.
    CASE 3XYZ Bhd recently issued 10-year bonds at a price of RM1,000. These bonds pay 3% in interest each six months. Their price has remained stable since they were issued. Due to additional financing needs, the firm wishes to issue new bonds that would have a maturity of 10 years, a par value of RM1,000, and pay RM40 in interest every six months. If both bonds have the same yield, how many new bonds must XYZ Bhd issue to raise RM2,000,000 cash?

(15 marks)

  • ABBA Corp has issued ABBA Bond on discount on April 6, 2010. This 8 percent bond is redeemable at par on April 6, 2030, or on any optional redemption date. The expected yield of the bond on the date of issue was 10 percent p.a. Coupon for the bond is paid quarterly. The earliest possible ABBA Corp could redeem the whole bond (but not in part) is at the end of its 12-year deferment period with a 12 percent call premium. An investor has decided to purchase this bond today, December 21, 2019, when the interest rate has increased by 2 percent (from the last known rate).
  1. Compute his current yield on the date of purchase.
  1. Compute his yield to call.

(10 marks)

QUESTION 2

  1. Mohmad Corporation currently holds two batches of bonds. The firm has bought ten units of bond issued by Adnan Corporation and twenty units of bond issued by Hassan Corporation.

Investment manager of Mohmad Corporation is contemplating whether to sell Bond Adnan or to hold the bond until maturity. If the manager decided to sell the bond; he will sell the bond at the same year when Bond Hassan is being called. He hopes to maximize the return from both batches of bonds when prevailing market interest rate falls in the future.

The details on Bond Adnan:

This bond was issued on 15th February 2014 at issue price of 10 percent discount of RM1,500 par value. Ten units of this bond was purchased on 15th March 2016 (2016 is a leap year) during which the prevailing interest rate is 5.40 percent per annum. The issuer promises to pay 5.67 percent p.a. Coupon is paid once in every three months. This bond will mature in year 2040.

The details on Bond Hassan:

Twenty units of bond were purchased on today’s dated 14th January 2021 at 6.5 percent yield. This 6 ¼ percent, RM1,300, 10-year bond was issued at par on 1st March 2020. This bond’s first call date will be five years from the date of issue. If the bond being called, the investors will be compensated with a 25 percent call premium. The expected future interest rate on the first call date is 4.5 percent.

You are the assistance investment manager of Mohmad Corporation. The senior manager is asking you to compare the investment plan for both batches of bond. You are required to calculate:

  1. The yield to maturity of Bond Adnan.
  1. The yield to call of Bond Hassan at the first call date.
  1. The capital gain/loss yield of both batches of bond based on these plans:
PLAN 1PLAN 2
Hold Bond Adnan until maturity.   Hold Bond Hassan until the first call date.Sell Bond Adnan in the same year Bond Hassan being called at the first call date.   Hold Bond Hassan until the first call date.

Advise and comment on the investment plan that you will recommend to the senior investment manager based on your answer in c) above. (Use 4-decimal in all calculations workings).

(15 marks)

  • As an active investor in the Bond market, Johnny purchased a sum of bonds at a yield of 12 percent p.a. Attached below is the bond purchase agreement between him and MWAM Bank Berhad:
MWAM Bank Berhad
BOND PURCHASE AGREEMENT
Bond NameGreen Initiative- MWAM 2010 Bond
Transaction DateFebruary 05, 2020
Account ReferenceMWAMXT19789- 01Account TypeConventional
Bond Term20-yearCoupon Interest8.00%
Issuance DateMarch 15, 2010Type of BondStraight
Par ValueRM1,000Maturity DateMarch 15, 2030
Coupon DateEvery March 15 and September 15
ConsiderationBy making PAYMENT, you agree to the Terms and Conditions set out as attached with this Purchase Agreement.

You are required to:

  1. Compute the Book value on the transaction date.
  1. Determine the current yield on the date of purchase.

(8 marks)

(2 marks)