Question

NCB issued semiannual bonds that matures after 10 years, with coupon rate of 10%

and discount rate of 9% and face value of SR1000, as CFO of Saudi Company, you

are required to:

1. List the bond features being offered (1)

2. Draw the timeline of the cash flow (1)

3. What is the Coupon payment (1)

4. Determine the right formula of present value (discounting) to be used (1)

5. Review the formula to account compounding frequency (annuity payments,

interest rate) if there is a need. (2)

6. Calculate the bond’s current price/value (1)

7. What do you understand from valuation/price? In other words, is the bond

price higher or less than face value? and why? (2)

8. Calculate the current yield of the bond. (1)

9. How much is the capital gains of the bond? (1)

10. Does bond value decrease or increase to maturity? Why? (2)

11. Assume that the bond is callable; do you recommend the bond issuer to

call? Why? (2)

Answer 1

I can only answer 4 subparts at a time.

1. Bond features:
Coupon = C = 10% annually = 5% semiannually
yield to maturity = YTM = 9%(annually) = 4.5% (semiannually)
coupon type= semiannual
Face value = FV = SR1000

3. Coupon payment = C = 5% of SR1000 = SR50

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