Fixed Income Securities

Fixed Income Securities

A. Capital Market Fixed Income Securities

QUESTION 1:

A 6 years bond of ₹1000 has an annual rate of interest of 14%. The interest is paid half yearly. If
the required rate of return is 16%, what is the value of bond?
Solution:
Coupon = 1,000 × 14% × 6/12 = 70
IV = 70 × PVAF (8%, 12 periods) + 1,000 × PVF (8%, 12 periods)
= 527.53 + 397.11
= 924.64

QUESTION 2:

A Company proposes to sell 10-year Debentures of ₹10,000 each. The Company would repay
₹1,000 at every year end and will pay interest annually at 15% on the outstanding amount. Find
the PV of the Debentures, if the Capitalization Rate is 18%.
Solution:
Interest @ PVAF @
Year Principle Repayment Total CFs
15% 18%
1 10,000 1500 1,000 2,500 0.847 2117.50
2 9,000 1350 1,000 2,350 0.718 1687.30
3 8,000 1200 1,000 2,200 0.609 1339.80
4 7,000 1050 1,000 2,050 0.516 1057.80
5 6,000 900 1,000 1,900 0.437 830.30
6 5,000 750 1,000 1,750 0.370 647.50
7 4,000 600 1,000 1,600 0.314 502.40
8 3,000 450 1,000 1,450 0.266 385.70
9 2,000 300 1,000 1,300 0.225 292.50
10 1,000 150 1,000 1,150 0.191 219.65
9080.45

163
Adish Jain CA CFA
Fixed Income Securities

QUESTION 3:
RTP N 09

Given a five-year, 8% coupon bond with a face value of Rs.1,000 and coupon payments made
annually, determine its values given it is trading at the following yields: 8%, 6%, and 10%.
Comment on the price and yield relation you observe. What are the percentage changes in value
when the yield goes from 8% to 6% and when it goes from 8% to 10%?
Solution:
Year Coupon PV AF @8% PVAF @6% PVAF @ 10%
1 80 0.926 74.08 0.943 75.44 0.909 72.72
2 80 0.857 68.56 0.89 71.20 0.826 68.08
3 80 0.794 63.52 0.84 64.20 0.751 60.08
4 80 0.735 58.80 0.792 63.36 0.683 54.64
5 1080 0.681 736.45 0.747 806.76 0.621 670.68
1,000.44 1,083.96 924.20
Comment: As the yield increases the price decrease and as the yield decrease the price increases,
inverse relationship between yield and price
Percentage change in value:
1083.96 - 1000
Yield from 8% to 6% = = 8.35%
1000
924.2 - 1000
Yield from 8 to 10% = = 7.62%
1000

QUESTION 4:
M 16 | RTP

M/s Agfa industries is planning to issue a debenture series on the following terms:
Face Value ₹100
Term of maturity 10 years
Yearly coupon rate
Years
1–4 9%
5–8 10%
9 – 10 14%
The current market rate on similar debentures is 15 per cent per annum. The company proposes
to price the issue in such a manner that it can yield 16 per cent compounded rate of return to the

164
Adish Jain CA CFA
 Fixed Income Securities

investors. The Company also proposes to redeem the debentures at 5 per cent premium on
maturity. Determine the issue price of the debentures.
Solution:
Calculation of Issue Price
Year Coupon PVF @16% DCFs
1 9 0.862 7.76
2 9 0.743 6.69
3 9 0.641 5.77
4 9 0.552 4.97
5 10 0.476 4.76
6 10 0.41 4.1
7 10 0.354 3.54
8 10 0.305 3.05
9 14 0.263 3.68
10 14 0.227 3.18
10 105 0.227 23.84
Issue price of bond 71.34

QUESTION 5:
RTP | PM

John inherited the following securities on his uncle’s death:

Types of Security Nos. Annual coupon % Maturity Years Yield %
Bond A (₹1,000) 10 9 3 12
Bond B (₹1,000) 10 10 5 12
Preference shares C (₹100) 100 11 * 13*
Preference shares D (₹100) 100 12 * 13*
*Likelihood of being called at a premium over par.
Compute the current value of his uncle’s portfolio.
Solution:
Value of Bond A: = 90 × PVAF(12%, 3 years) + 1,000 × PVAF(12%, 3rd year)
= 216.16 + 711.78
= 927.94
Value of Bond B: = 100 × PVAF(@12%, 5 years) + 1,000 × PVAF(@12%, 5 years)
= 360.48 + 567.43
= 927.91
165
Adish Jain CA CFA
Fixed Income Securities

11
Preference Share C = = 84.62
0.13
12
Preference Share D = = 92.31
0.13
Value of Portfolio:
Security Value No. Total
Bond A 927.94 10 9,279.4
B 927.91 10 9,279.1
Preference Share C 84.62 100 8,462.0
D 92.31 100 9,231.0
36,251.5

QUESTION 6:
N 09

An investor is considering the purchase of the following Bond:

Face value ₹100
Coupon rate 11%
Maturity 3 Years
a. If he wants a yield of 13% what is the maximum price he should be ready to pay for?
b. If the Bond is selling for ₹97.60, what would be his yield?
Solution:
(a) IV = 11 × PVAF (13%, 3 years) + 100 × PVAF (13%, 3 Year)
= 25.97 + 69.31
= 95.28
RV - IP
Coupon +
n
(b) Yield = RV + IP
2
100 - 97.6
11 +
3
= 100 + 97.6
2
= 11.8%

QUESTION 7:
N 22 | N 19

166
Adish Jain CA CFA
 Fixed Income Securities

Mr. X wants to invest 1,00,000 in the 7 years 8% bonds in the market (Face Value 100) which were
issued 2 years ago.
1. You are requested to advise him what is the maximum price for bonds to be paid in the
following scenarios:
a. If Mr. X is expecting minimum 9% return on the bonds.
b. If Mr. X is expecting minimum 7% return on the bonds.
c. If the present rate of similar bonds issued is 8.25%.
d. If the present rate of similar bonds issued is 7.75%.
2. If the bonds are available at par and 1% is the transaction cost, what is the effective yield?
3. Find the number of days required to breakeven transaction cost if the bonds are available at
par and 2% is the transaction cost.
Solution:
1) a) Required yield rate = 9%
Year CF DF @ 9% PV
1–5 8 3.889 31.11
5 100 0.650 65.00
Value of Bond 96.11
b) Required yield rate = 7%
Year CF DF @ 7% PV
1–5 8 4.100 32.80
5 100 0.713 71.30
Value of Bond 104.1
c) Required yield rate = 8.25%
Year CF DF @ 8.25% PV
1–5 8 3.966 31.73
5 100 0.673 67.30
Value of Bond 99.03
d) Required yield rate = 7.75%
Year CF DF @ 7.75% PV
1–5 8 4.019 32.15
5 100 0.689 68.90
Value of Bond 101.05
2) Logical Solution:
Purchase price bond = 100 + 1%

167
Adish Jain CA CFA
Fixed Income Securities

= ₹ 101
Effective yield when purchase price is 101 = 7.75%
Solution by ICAI:
8
Effective yield if transaction cost is 1% = = 0.0792 or 7.92%
101
2%
3) Time taken to recover 2% transaction cost = × 365
8%
= 91.25 or 91 days.

QUESTION 8:
N 10

Calculation Market Price of:

a. 10% Government of India security currently quoted at ₹110, but yield is expected to go up by
1%.
b. A bond with 7.5% coupon interest, Face value ₹10,000 & term to maturity of 2 years, presently
yielding 6%. Interest payable half yearly.
c. Self-added part for class students: A bond with 7.5% coupon interest, Face value ₹10,000 &
term to maturity of 2 years, presently trading at ₹ 9,000. If interest payable half yearly,
calculate the YTM of the bond using:
1. Precise Method
2. Approximate Method
Solution:
a) Self-Note: In the absence of information regarding maturity of bonds, it can be assumed as
irredeemable. FV assumed as ₹ 100.

Coupon = 100 × 10% = ₹ 10

10
Calculation of existing yield = = 9.09%
110

Revised yield = 9.09% + 1% = 10.09%

10
Revised MP = = ₹ 99.11
10.09%
b) Value of bond = 375 × PVAF(3%, 4 periods) + 10,000 × PVF(3%, 4th period)
= 10,278.78
c)

168
Adish Jain CA CFA
 Fixed Income Securities

______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________

QUESTION 9:
M 04 | RTP M 09

There is a 9% 5-year bond issue in the market. The issue price is ₹90 and the redemption price
₹105. For an investor with marginal income tax rate of 30% and capital gains tax rate of 10%
(assuming no indexation), what is the post-tax yield to maturity?
Solution:
After Tax Coupon = 9 x (1 - 0.30) = 6.3
After Tax redemption Price = 105 – (15 x 0.10) = Rs.103.50
After Tax Capital gain = 103.5 – 90 = Rs.13.5
169
Adish Jain CA CFA
Fixed Income Securities

RV - IP
Coupon +
n
Post tax YTM = RV + IP
2
103.5 - 90
6.3 +
5
= 103.5 + 90
2
= 9.30%

QUESTION 10:
RTP N 09

Given a two-year, 8% annual coupon bond with a face value of Rs. 1,000 and with annual coupon
payments that is fully taxable and selling at par, and an identical bond that is tax free, what would
the yield and price on the tax-free bond have to be for an investor in a 35% tax bracket to be
indifferent between the two bonds?
Solution:
For the investor to be indifferent, the tax-free bond’s yield would have to be equal to the taxable
bond’s after-tax yield.
1,000 − 1,000
0.08(1 − 0.35) +
YTM = 2
1,000 + 1,00
2
= 5.2%
Thus, the tax-free bond would have to yield 5.2% for the investor to be indifferent. Given a 5.2%
discount rate, the price of the tax-free bond would be:
80 100 + 80
P0 = +
1.052 1.0522
= 1051.92

QUESTION 11:
M 15

On 31st March 2013, the following information about Bonds is available:

Name of Security Face Value ₹ Maturity Date Coupon Rate Coupon Date (s)
st
Zero coupon 10,000 31 March, 2023 N.A. N.A.
th
T – Bill 1,00,000 20 June, 2013 N.A. N.A.

170
Adish Jain CA CFA
 Fixed Income Securities

10.71% GOI 2023 100 31st March, 2023 10.71 31st March
10% GOI 2018 100 31st March, 2018 10.00 31st Mar & 30th Sept
Calculate:
a. If 10 years yield is 7.5% p.a. what price the Zero Coupon Bond would fetch on 31 st March,
2013?
b. What will be the annualized yield if the T-Bill is traded @ 98500?
c. If 10.71% GOI 2023 Bond having yield to maturity is 8%, what price would it fetch on April 1,
2013 (after coupon payment on 31st March)?
d. If 10% GOI 2018 Bond having yield to maturity is 8% what price would it fetch on April 1, 2013
(after coupon payment on 31st March)?
Solution
(i) Rate used for discounting shall be yield.
10,000
Accordingly, ZCB shall fetch: = ₹4,852
(1 + 0.075)10
(ii) The day count basis is actual number days/365. Accordingly annualized yield shall be:
FV - Price 365
= × × 100
Price No. of days
1,00,000 - 98,500 365
= × × 100
98,500 81
= 6.86%
Note: Alternatively, it can also computed on 360 days a year.
(iii) Price GOI 2023 would fetch
= 10.71 × PVAF(8%, 10) + 100 × PVF(8%, 10)
= 10.71 x 6.71 + 100 x 0.4632
= ₹ 118.18
(iv) Price GOI 2018 Bond would fetch:
= 5 × PVAF(4%, 10) + 100 × PVF(4%, 10)
= 5 x 8.11 + 100 x 0.6756
= 108.11

QUESTION 12:
RTP N 20

Today being 1st January 2019, Ram is considering to purchase an outstanding Corporate Bond
having a face value of ₹ 1,000 that was issued on 1st January 2017 which has 9.5% Annual Coupon
and 11 years of original maturity (i.e., maturing on 31st December 2027). Since the bond was

171
Adish Jain CA CFA
Fixed Income Securities

issued, the interest rates have been on downside and it is now selling at a premium of ₹ 125.75
per bond.
Determine the prevailing interest on the similar type of Bonds if it is held till the maturity which
shall be at Par.
PV Factors:
1 2 3 4 5 6 7 8 9
6% 0.943 0.890 0.840 0.792 0.747 0.705 0.665 0.627 0.592
8% 0.926 0.857 0.794 0.735 0.681 0.630 0.583 0.540 0.500
Solution:
Self-Note: We could have applied the Approximate Method formula of calculating YTM, but PV
factors given in the question is a hint for IRR method.
Given details:
FV = ₹ 1000
Coupon = 0.095 x 1000 = ₹ 95
n = 9 years
P0 = 1,000 + 125.75 = ₹ 1125.75
To determine the prevailing rate of interest for the similar type of Bonds we shall compute the
YTM of this Bond using IRR method as follows:
₹ 95 × PVIFA(YTM%,9) + ₹ 1000 × PVIF(YTM%,9) = ₹ 1125.75
Calculation of PV of CFs at 6% :
= 95 × PVAF(6%, 9 years) + 1000 × PVF(6%, 9th year)
= 95 × 6.801 + 1,000 × 0.592
= 1,238.12
Calculation of PV of CFs at 8%:
= 95 × PVAF(8%, 9 years) + 1000 × PVF(8%, 9th year)
= 95 × 6.246 + 1,000 × 0.500
= 1,093.39
Calculating precise yield using interpolation:
6% ––––––––– 1,238.12
?=x 1,125.75
8% ––––––––– 1,093.39
Calculating x:
x-6 1125.75 - 1238.12
=
8 - 6 1093.39 - 1238.12
x = 7.55%

172
Adish Jain CA CFA
 Fixed Income Securities

Prevailing interest on the similar type of Bonds = 7.55%

QUESTION 13:
RTP N 19

A hypothetical company ABC Ltd. issued at 10% Debenture (Face Value of Rs. 1000) of the
duration of 10 years is currently trading at Rs. 850 per debenture. The bond is convertible into 50
equity shares being currently quoted at Rs. 17 per share.
If yield on equivalent comparable bond is 11.80%, then calculate the spread of yield of the above
bond from his comparable bond.
The relevant present value table is as follows:
Present Values t1 t2 t3 t4 t5 t6 t7 t8 t9 t10
PVIF 0.11, t 0.901 0.812 0.731 0.659 0.593 0.535 0.482 0.434 0.391 0.352
PVIF 0.13, t 0.885 0.783 0.693 0.613 0.543 0.480 0.425 0.376 0.333 0.295
Solution:
we shall compute the YTM of this Bond using IRR method, using below equation:
= 100 × PVIFA(YTM%,10) + ₹ 1000 × PVIF(YTM%,10) = 850
Calculation of PV of CFs at 11% :
= 100 × PVAF(11%, 10 years) + 850 × PVF(11%, 10th year)
= 100 × 5.890 + 1,000 × 0.352
= 941
Calculation of PV of CFs at 13%:
= 100 × PVAF(13%, 10 years) + 850 × PVF(13%, 10th year)
= 100 × 5.426 + 1,000 × 0.295
= 837.6
Calculating precise yield using interpolation:
11% ––––––––– 941
?=x 850
13% ––––––––– 837.6
Calculating x:
x - 11 850 - 941
=
13 - 11 837.6 - 941
x = 12.76%
The spread from comparable bond = 12.76% - 11.80% = 0.96%

173
Adish Jain CA CFA
Fixed Income Securities

QUESTION 14:
M 09

Consider two Bonds, one with 5 years to maturity and the other with 20 years to maturity. Both
the bonds have a Face Value of ₹1,000 and Coupon Rate of 8% (with annual interest payments)
and both are selling at par. Assume that the yields of both the bonds fall to 6%, whether the Price
of Bond will increase or decrease? What percentage of this increase/decrease comes from a
change in the Present Value of Bond’s principal amount and what percentage of this
increase/decrease comes from a change in the Present Value of Bond’s Interest Payments?
Solution:
For a 5-year bond:
Year CFs PVAFs @ 8% DCFs PVAFs @ 6% DCFs Change
1–5 80 3.993 319.44 4.212 336.96 17.52
5 1000 0.681 681 0.747 747 66
1000 1083.96 83.52
If the yield of the bond falls the price will always increase. In case of 5-year bond, value increased
from Rs. 1000 to Rs. 1083.96.
17.52
% of total change due to change in PV of Interest: = = 20.98%
83.52
66
% of total change due to change in PV of Principal: = = 79.02%
83.52

For a 20-year bond:

Year CFs PVAFs @ 8% DCFs PVAFs @ 6% DCFs Change
1 – 20 80 9.818 785.44 11.470 917.6 132.16
20 1000 0.215 215 0.312 312 97
1000 1229.6 229.16
In case of 20 year bond also, value increased from Rs. 1000 to Rs. 1229.6.
132.16
% of total change due to change in PV of Interest: = = 57.67%
229.16
97
% of total change due to change in PV of Principal: = = 42.33%
229.16

174
Adish Jain CA CFA
 Fixed Income Securities

QUESTION 15:
RTP M 11

S Ltd has the following outstanding Bonds-

Bond Coupon Maturity
Series X 8% 10 Years
Series Y Variable changes annually comparable to prevailing rate 10 Years
Initially these Bonds were issued at Face Value of ₹10,000 with yield to maturity of 8%. Assuming
that:
a. After 2 years from the date of issue, interest on comparable bonds is 10%, then what should
be the price of each Bond?
b. If after two additional years, the interest rate on comparable bond is 7%, then what should
be the price of each Bond?
c. What conclusions you can draw from the prices of Bonds, computed above?
Solution:
(i) Series X
Price = 800 PVAF(10%, 8 years) + 10,000  PVAF(10%, 8 years)
= Rs. 800 x 5.335 + Rs.10,000 x 0.467
= 8,938
Series Y
Price = 1,000 PVAF(8 years 10%) + 10,000  PVAF(8th year, 10%)
= Rs.1,000 x 5.335 + Rs.10,000 x 0.467
= 10,005
(ii) Series X
Price = 800 PVAF(7%, 6 years) + 10,000  PVAF(7%, 6 years)
= Rs.800 x 4.767 + Rs.10,000 x 0.666
= 10,474
Series Y
Price = 700 PVAF(7%, 6 years) + 10,000  PVAF(7%, 6 years)
= Rs.700 x 4.767 + Rs. 10,000 x 0.666
= 9,997
(iii) Conclusion: From above prices it can be concluded that price of Bond-Series X moves
inversely with change in interest rate. Whereas, the price of Bond Series Y does not
fluctuate, reason being its interest (coupon) adjusted according to change in interest rates.
175
Adish Jain CA CFA
Fixed Income Securities

QUESTION 16:
N 11 | N 08 | RTP

Based on the credit rating of bonds, Mr. Z has decided to apply the following discount rates for
valuing bonds:
Credit Rating Discount Rate
AAA 364 day T bill rate + 3% spread
AA AAA + 2% spread
A AAA + 3% spread
He is considering to invest in AA rated, ₹1,000 face value bond currently selling at ₹1,025.86. the
bond has five years to maturity and the coupon rate on the bond is 15% p.a. payable annually.
The next interest payment is due one year from today and the bond is redeemable at par. (Assume
the 364 day T-bill rate to be 9%).
You are required to calculate the intrinsic value of the bond for Mr. Z should be invest in the bond?
Also calculate the current yield and the Yield to Maturity (YTM) of the bond.
Solution:
Discount Rate: AAA 9 + 3 = 12%
AA 12 + 2 = 14%
Intrinsic Value = 150  PVAF(14%, 5 years) + 1,000  PVAF(14%, 5th years )
= 514.96 + 519.37
= 1,034.33
Current Yield = Coupon
CMP
= 150 = 14.62%
1025.86
1,000 − 1,025.86
150 +
5 144.828
YTM = =
1,000 + 1,025.86 1,012.96
2
= 14.30%

QUESTION 17:
N 07

MP Ltd issue a new series of bonds on January 1, 2010. The bonds were sold at par (₹1,000),
having a coupon rate 10% p.a. and mature on 31 st December, 2025. Coupon payments are made
176
Adish Jain CA CFA
 Fixed Income Securities

semi-annually on June 30th and December 31st each year. Assume that you purchased an
outstanding MP Ltd. bond on 1st March, 2018 when the going interest rate was 12%.
Required:
a. What was the YTM of MP Ltd. bonds as on January 1, 2010?
b. What amount you should pay to complete the transaction? Of that amount how much should
be accrued interest hand how much would represent bond basic value.
Solution:
(i) YTM of the bond on Jan 1, 2010:
RV − IP
I+
Periodic YTM = n
RV + IP
2
1,000 - 1,000
50 +
32
= 1,000 + 1,000 = 5% per 6m
2

Annualized YTM = 5  2 = 10% p.a.

(ii) Value of bond on 1st July 2018 = 50  PVAF(6%, 15) + 1000  PVF(6%, 15)
= 50  9.712 + 1000  0.417
= 902.6
Value of bond on 30th June (including coupon) = 902.6 + 50 = 952.6
952.6
Value of bond on 1st March 2018 =
1 + 0.06 × 4⁄6
= 915.96
Coupon Accrued for 2M = 1,000  10%  2/12
= 16.67
Amount to be paid to complete the transaction is = ₹ 915.96.
Amount paid for accrued interest = ₹ 16.67
Amount paid for bond’s basic value = ₹ 899.29

QUESTION 18:

177
Adish Jain CA CFA
Fixed Income Securities

Anil had purchased a Bond at a price of ₹800 with a coupon payment of ₹150 and sold at for
₹1,000.
(i) What is his Holding Period Return?
(ii) If the Bond is sold for ₹750 after receiving ₹150 as Coupon Payment, then what is his Holding
Period Return?
Solution:
150 + 1,000 − 800
(i) Holding Period Return = = 43.75%
800
150 + 750 − 800
(ii) Holding Period Return = = 12.5%
800

QUESTION 19:
MTP M 18

XYZ Ltd.’s bond (Face Value of Rs. 1000) with 4 years maturity is currently trading at Rs. 900
carrying a coupon rate of 15%. Assuming that the reinvestment rate is 16%, you are required to
calculate Realized Yield to Maturity of the bond.
Solution:
We shall compute Realized Yield to Maturity (r) as follows:
0 1 2 3 4
Investment (Rs.) 900
Annual Interest (Rs.) 150 150 150 150
Compound Factor @ 16% 1.56 1.35 1.16 1.00
Future Value of Intermediate cash
Flows (Rs.) 234.00 202.50 174.00 150.00
Maturity Value (Rs.) 1000.00
900.00 234.00 202.50 174.00 1150.00
Total of Future Benefits 1760.5
Accordingly, realised yield:
900 (1+r)4 = 1760.50
(1+r)4 = 1.956
r = 18.30%

QUESTION 20:
M 21 MTP

178
Adish Jain CA CFA
 Fixed Income Securities

ABC Ltd. wants to issue 9% Bonds redeemable in 5 years at its face value of Rs. 1,000 each. The
annual spot yield curve for similar risk class of Bond is as follows:
Year Interest Rate
1 12%
2 11.62%
3 11.33%
4 11.06%
5 10.80%
a. Evaluate the expected market price of the Bond if it has a Beta value of 1.10 due to its
popularity because of lesser risk.
b. Interpret the nature of the above yield curve and reasons for the same.
Note: Use PV Factors upto 4 decimal points and value in Rs. upto 2 decimal points.
Solution:
(i) For finding expected market price first we shall calculate Intrinsic Value of Bond as follows:
` 90 ` 90 ` 90 ` 90 ` 90 ` 1,000
IV = + + + + +
1 + 0.12 (1 + 0.1162) (1 + 0.1133) (1 + 0.1106) (1 + 0.1080)
2 3 4 5
(1 + 0.1080)5
= 80.36 + 72.23 + 65.22 + 59.16 + 53.89 + 598.80
= ₹ 929.66
Expected Price = Intrinsic Value × Beta Value
= 929.66 × 1.10
= ₹ 1,022.63
(ii) The given yield curve is inverted yield curve. The main reason for this shape of curve is
expectation for forthcoming recession when investors are more interested in Short-term
rates over the long term.

QUESTION 21:
N 08 | RTP

The following is the Yield structure of AAA rated debenture:

Period Yield (%)
3 months 8.50
6 months 9.25
1 year 10.50
2 years 11.25
3 years and above 12.00

179
Adish Jain CA CFA
Fixed Income Securities

a. Based on the expectation theory calculate the implicit one-year forward rates in year 2 and
year 3.
b. If the interest rate increases by 50 basis points, what will be the percentage change in the
price of the bond having a maturity of 5 years? Assume that the bond is fairly priced at the
moment at Rs.1,000.
Solution:
(a) One year forward rate in year 2 (i.e., FR(1  2)):
(1 + 0.125)2 = (1 + 0.1050)1  (1 + r)1
(1.1125)2 = (1.1050)1  (1 + r)
r = 12.01%
One year forward rate in year 3 (i.e., FR(2  3)):
(1 + 0.12)3 = (1 + 0.1125)2  (1 + r)1
(1.12)3 = (1.1125)2  (1 + r)1
r = 13.52%
(b) Self-note: In the absence of information, given bond is assumed as ZCB. Since, we know that
yields given in the question are spot rates and therefore, they can be used as the YTM of
assumed ZCB.
Calculating RV of the bonds:
RV
Existing CMP =
(1 + Existing YTM)n
RV
1,000 =
(1 + 12%)5
RV = 1,762.34
Calculating revised price using revised YTM:
RV
Revised CPM =
(1 + Revised YTM)n
1,762.34
=
(1 + 12.5%)5
= 977.97
977.97 - 1,000
% change in price = = - 2.20%
1,000

180
Adish Jain CA CFA
 Fixed Income Securities

QUESTION 22:
N 18 | N 13

Sonic Ltd. issued 8% 5-year bonds of ₹ 1,000 each having a maturity of 3 years. The present rate
of interest is 12% for one year tenure. It is expected that Forward rate of interest for one year
tenure is going to fall by 75 basis points and further by 50 basis points for next year. This bond
has a beta value of 1.02 and is more popular in the market due to less credit risk.
Calculate:
a. Intrinsic Value of bond.
b. Expected price of bond in the market.
Solution:
(a) Intrinsic value of Bond
80
CF1 = = 71.43
(1.12)
80
CF2 = = 64.21
(1.12) (1.1125)
1080
CF3 = = 782.64
(1.12) (1.1125) (1.1075)
Value of Bond = 918.28
(b) Expected Price = 918.28 × 1.02 = 936.65

QUESTION 23:
N 20

Following are the yields on Zero Coupon Bonds (ZCB) having a face value of ₹ 1,000:
Maturity (Years) Yield to Maturity (YTM)
1 10%
2 11%
3 12%
Assume that the term structure of interest rate will remain the same.
You are required to
a. Calculate the implied one year forward rates
b. Expected Yield to Maturity and prices of one year and two-year Zero-Coupon Bonds at the
end of the first year.
Solution:
(a) Calculation of 1 year forward rate after 1 year i.e., FR (1 × 2)
(1 + 0.11)2 = (1 + 0.10) × (1 + r)

181
Adish Jain CA CFA
Fixed Income Securities

r = 12.01%
Calculation of 1 year forward rate after 2 years i.e., FR (2 × 3)
(1 + 0.12)3 = (1 + 0.11)2 × (1 + r)
r = 14.03%
(b) Calculation of YTM of:
1-year ZCB after 1 years = FR(1  2)
= 12.01%
2-year ZCB after 1 years = FR(1  3)
(1 + 0.12)3 = (1 + 0.1)1 × (1 + FR(1  3))2
FR(1  3) = 13.01%
Calculation of Price
1,000
1-year ZCB = = 892.78
1 + 12.01%
1,000
2-year ZCB = = 783.01
(1.1301 )2

QUESTION 24:
M 10 | N 07 | RTP

From the following data for Government securities, calculate the forward rates:
Face value (₹) Interest Rate Maturity (Year) Current Price (₹)
1,00,000 0% 1 91,000
1,00,000 10.5% 2 99,000
1,00,000 11.0% 3 99,500
1,00,000 11.5% 4 99,900
Solution:
Calculation of forward Rates
1,00 ,000
Forward Rate(0 × 1): 91,000 =
(1 + r1 )1
91,000 + 91,000 r1 = 1,00,000
r1 = 9.89%
10 ,500 1,10 ,500
Forward Rate(1 × 2): 99,000 = +
(1.0989) (1.0989)(1 + r2 )

182
Adish Jain CA CFA
 Fixed Income Securities

1,10 ,500
99,000 = 9555.0 +
(1.0989)(1 + r2 )
r2 = 12.42%
11,000 11,000 1,11,000
Forward Rate(2 × 3): 99,500 = + +
1.0989 (1.0989)(1.1242) (1.0989)(1.1242)(1 + r3 )
1,11,000
99,500 = 10,010 + 8,904.12 +
(1.989)(1.1242)(1 + r3 )
11.50% = r3
11,500 11,500 11,500
Forward Rate(3 × 4): 99,900 = + +
1.0989 (1.0989) (1.1242) (1.0989) (1.1242) (1.1150)
1,11,500
+
(1.0989) (1.1242) (1.1150) (1 + r4 )
1,11,500
99,900 = 10,465.01 + 9,308.85 + 8,348.75 +
1.3775(1 + r4 )
r4 = 12.77%

QUESTION 25:
RTP | PM

Pet feed plc has outstanding, a high yield bond with the following features:
Face Value €10,000
Coupon 10%
Maturity Period 6 Years
Special Feature company can extend the life of Bond to 12 years
Presently the interest rate on equivalent bond is 8%
(i) If an investor expects that interest will be 8%, six years from now then how much he should
pay for this bond now.
(ii) Now suppose, on the basis of that expectation, he invests in the bond, but interest rate turns
out to be 12%, six years from now, then what will be his potential loss/gain if the company
extents the life of Bond for another 6 years.
Solution:
(i) Six years from now, if the interest rate is expected to be 8%, then the company will not
extent the bond. Hence total maturity of the bond is expected to be 6 years.
Value of Bond = 1,000 PVAF(8%, 6 years) + 10,000  PFAV(8%, 6th years)
= 1,000  4.623 + 10,000  0.630

183
Adish Jain CA CFA
Fixed Income Securities

= £10,923
(ii) At the end of 6th year, if the interest actually turns out to 12%, then the company will
extend the bond for further period of six years. Hence, total maturity becomes 12 years.
Value of the bond at the end of 6th year:
Value of Bond = 1,000 PVAF(12%, 6 years) + 10,000  PVAF(12%, 6th year)
= 1,000  4.111 + 10,000  0.507
= £ 9,181
Potential loss = 9,181 – 10,923= £1,742

QUESTION 26:
N 21 | N 18 | RTP

Tangent Ltd. is considering calling ₹ 3 crores of 30 years, ₹ 1,000 bond issued 5 years ago with a
coupon interest rate of 14 per cent. The bonds have a call price of ₹ 1,150 and had initially
collected proceeds of ₹ 2.91 crores since a discount of ₹ 30 per bond was offered. The initial
floating cost was ₹ 3,90,000. The Company intends to sell ₹ 3 crores of 12 per cent coupon rate,
25 years bonds to raise funds for retiring the old bonds. It proposes to sell the new bonds at their
par value of ₹ 1,000. The estimated floatation cost is ₹ 4,25,000. The company is paying 40% tax
and its after tax cost of
debt is 8 per cent. As the new bonds must first be sold and then their proceeds to be used to
retire the old bonds, the company expects a two months period of overlapping interest during
which interest must be paid on both the old and the new bonds. You are required to evaluate the
bond retiring decision. [PVIFA 8%, 25 = 10.675]
Solution:
(a) Net PV of futures cash flows if old bonds are not retired: (i.e., CFs from existing bonds)
PV of after-tax coupon (2,69,01,000)
[3,00,00,000  14% (1 – 0.40)  10.675]

PV of tax savings on after-tax floatation cost and discount on issue 1,83,610

(3,90,000 + 9,00,000)
[  0.40  10.675 ]
30
PV of net cash outflow (A) (2,67,17,390)

(b) Net PV of futures cash flows if old retired by issue of new bonds:
After-tax call premium (27,00,000)
[30,000  (1,000 – 1,150)  (1 – 0.40)]
184
Adish Jain CA CFA
 Fixed Income Securities

Floatation cost of new bonds (4,25,000)

PV of tax benefit on floatation cost of new bonds 72,590

4,25,000
[  (40%)  10.675]
25

PV of after-tax coupon (2,30,58,000)

[3,00,00,000  12%  (1 – 0.4)  10.675]

Post-tax over-lapping interest for 2m @ old coupon rate (4,20,000)

2
[3,00,00,000  14%   (1 - 0.40)]
12
Tax saving on unamortised floatation cost & discount of old bond 4,30,000
25
[ (3,90,000 + 9,00,000)   40%]
30
PV of net cash outflow (B) (2,61,00,410)

(c) NPV of Bond refunding: = (A) – (B)

= 2,67,17,390 - 2,61,00,410
= 6,16,980

QUESTION 27:
N 21 | M 13 | M 09 | SM | RTP

ABC Ltd. has ₹ 300 million, 12 per cent bonds outstanding with six years remaining to maturity.
Since interest rates are falling, ABC Ltd. is contemplating of refunding these bonds with a ₹ 300
million issue of 6 year bonds carrying a coupon rate of 10 per cent. Issue cost of the new bond
will be ₹ 6 million and the call premium is 4 per cent. ₹ 9 million being the unamortized portion
of issue cost of old bonds can be written off no sooner the old bonds are called off. Marginal tax
rate of ABC Ltd. is 30 per cent. You are required to analyse the bond refunding decision.
Solution:
Self-Note: Cost of debt, which is used for discounting the CFs, is missing in the question. Now, best
assumption of it will be to take the YTM of the bonds to be newly issued. Since, new bonds are
issued at par, its YTM can be considered same as its Coupon Rate of 10%. Note that post tax cost
of debt is used for discounting. (10% (1 – 0.30) = 7%)
(All calculations are in ₹ million)
(a) Net PV of futures cash flows if old bonds are not retired: (i.e., CFs from existing bonds)

185
Adish Jain CA CFA
Fixed Income Securities

PV of after-tax coupon (120.1284)

[300  12% (1 – 0.30)  4.767]

PV of tax savings on after-tax floatation cost and discount on issue 2.1452

9
[  30%  4.767]
6
PV of net cash outflow (A) (117.9832)

(b) Net PV of futures cash flows if old retired by issue of new bonds:
After-tax call premium (8.4)
[300  4%  (1 – 0.30)]

Floatation cost of new bonds (6)

PV of tax benefit on floatation cost of new bonds 1.4301

6
[  (30%)  4.767]
6
PV of after-tax coupon (100.107)
[300  10%  (1 – 0.3)  4.747]

Tax saving on unamortised floatation cost & discount of old bond 2.7
[ 9  30%]

PV of net cash outflow (B) (110.3769)

(c) NPV of Bond refunding: = (A) – (B)

= 117.9832 - 110.3769
= 7.6063

QUESTION 28:
RTP M 14

Mr. A is planning for making investment in bonds of one of the two companies X Ltd. and Y Ltd.
the detail of these bonds is as follows:
Company Face Value Coupon Rate Maturity Period
X Ltd. ₹10,000 6% 5 years
Y Ltd. ₹10,000 4% 5 years

186
Adish Jain CA CFA
 Fixed Income Securities

The current market price of X Ltd.’s bond is ₹10,796.80 and both bonds have same Yield to
Maturity (YTM). Since Mr. A considers duration of bonds as the basis of decision making. You are
required to calculate the duration of each bond and you decision.
Solution:
Calculation YTM by IRR method:
Year CF’s PVF @ 5% DCF @ 5% PVF @ 4% DCF @ 4%
1 600 0.952 571.2 0.962 577.2
2 600 0.907 544.2 0.925 555.0
3 600 0.864 518.4 0.889 533.4
4 600 0.823 493.8 0.855 513.0
5 10,600 0.784 8310.4 0.822 8,713.2
10,438.0 10,891.8
Calculating precise YTM, using interpolation:
X - 4 10796.8 - 10891.8
=
5 - 4 10438.0 - 10891.8
X = 4.21%
Calculating duration of Bond X:
Year CF’s PVF @ 4.21% DCF Weight (w) year  w
1 600 0.960 576.0 0.0534 0.05
2 600 0.921 552.6 0.0512 0.10
3 600 0.884 530.4 0.0491 0.15
4 600 0.848 508.8 0.0471 0.19
5 10,600 0.814 8628.4 0.7992 4.00
10796.2 1.0000 4.49
Duration = 4.489 years

Calculating duration of Bond Y:

Year CF’s PVF @ 4.21% DCF (w) Year  w
1 400 0.960 384.0 384.0
2 400 0.921 368.4 736.8
3 400 0.884 353.6 1,060.8
4 400 0.848 339.2 1,356.8
5 10,400 0.814 8465.6 42,328.0
9910.8 45866.4
45,866.4
Duration: = = 4.628 years
9,910.8

187
Adish Jain CA CFA
Fixed Income Securities

Decision: Since the duration of Bond of X Ltd. is lower, therefore, it is less risky and it should be
preferred.

QUESTION 29:
J 21 | N 15 | RTP N 12

The following data is available for a bond:

Face Value ₹1,000
Coupon Rate 11%
Years to Maturity 6
Redemption Value ₹1,000
Yield to Maturity 15%
(Round-off your answers to 3 decimals)
Calculate the following in respect of the bond.
a. Current Market Price
b. Duration of the Bond
c. Volatility of the Bond
d. Expected market price if increase in required yield is by 100 basis points
e. Expected market price if decrease in required yield is by 75 basis points
Solution:
Year CF’s PVF @ 15% DCF (w) Year X w
1 110 0.870 95.70 95.70
2 110 0.756 83.16 166.32
3 110 0.658 72.38 217.14
4 110 0.572 62.92 251.68
5 110 0.497 54.67 273.35
6 1,110 0.432 479.52 2,877.12
848.35 3881.31
(a) Price = 848.35
3,881.31
(b) Duration = = 4.58 years
848.35
4.58
(c) Volatility = = 3.98%
1 + 0.15
(d) If yield increases by 100 bps,
The Market price of bond will come down by: 1%  3.98 = 3.98%
Expected Market Price= 848.35 – 3.98% = 814.59
188
Adish Jain CA CFA
 Fixed Income Securities

(e) If yield decreases by 75 bps,

The Market price of bond will go up by: 0.75%  3.98 = 2.985%
Expected Market Price= 848.35 + 2.985% = 873.67

QUESTION 30:
M 23 | M 21

An investor has recently purchased substantial number of 7 year 6.75% ₹ 1,000 bond with 5%
premium payable on maturity at a required Yield to Maturity (YTM) of 9%. However, due to a
financial crunch he is looking to sell these bonds and has got a proposal from another investor,
who is willing to purchase these bonds by shelling out a maximum amount of ₹ 897 per bond.
Investors follow intrinsic value method for valuation of bonds.
1. You are required to determine
a. The Market Price, Duration and Volatility of the bond and
b. Required YTM of the new investor
2. What is relationship between the price of the bond and YTM?
Period (t) 1 2 3 4 5 6 7
PVIF (9%, t) 0.917 0.842 0.772 0.708 0.650 0.569 0.547
Solution:
(1) (a) Market Price & Duration of Bond
Year Cash flow DCFs @ 9% DCF (W%) W%  Years
1 67.50 0.917 61.898 0.0677 0.0677
2 67.50 0.842 56.835 0.0622 0.1244
3 67.50 0.772 52.110 0.0570 0.1710
4 67.50 0.708 47.790 0.0523 0.2092
5 67.50 0.650 43.875 0.0480 0.2400
6 67.50 0.596 40.230 0.0440 0.2640
7 1117.50 0.547 611.273 0.6688 4.6816
914.01 5.7579
Market Price of the bond is 914.01
Duration of the Bond is 5.758 years
Volatility of Bond = Duration/(1+YTM) = 5.758/(1+0.09) = 5.28
(b) Required yield of new Investor

189
Adish Jain CA CFA
Fixed Income Securities

Price = 67.50 PVIAF(r,7) + 1050 X PVIF(r, 7)

Now, let us discount the cash flow by 9%
PV @ 9% = 67.50 PVIAF(9%,7) + 1050  PVIF(9%,7)
= 67.50  5.032 + 1050  0.547
= 914.01
NPV @ 9% = 914.01 – 897 = ₹ 17.01
Since, NPV of bond is positive, we need to increase discount rate say 12%
PV @ 12% = 67.50 PVIAF (12%,7) + 1050  PVIF (12%,7)
= 67.50  4.564 + 1050  0.452
= 782.67
NPV @ 12% = 782.67 - 897= - ₹ 114.33
Now we use interpolation formula
Required yield of new Investor = 9.39%
(2) Relationship between the price of the bond & YTM is opposite or inverse.

QUESTION 31:
N 08 | RTP

XL Ispat Ltd. has made an issue of 14 per cent non-convertible debentures on January 1, 2007.
These debentures have a face value of Rs.100 and is currently traded in the market at a price of
Rs.90.
Interest on these NCDs will be paid through post-dated cheques dated June 30 and December 31.
Interest payments for the first 3 years will be paid in advance through post-dated cheques while
for the last 2 years post-dated cheques will be issued at the third year. The bond is redeemable
at par on December 31, 2011 at the end of 5 years.
Required:
a. Estimate the current yield and the YTM of the bond.
b. Calculate the duration of the NCD.
c. Assuming that intermediate coupon payments are, not available for reinvestment calculate
the realised yield on the NCD.
Solution:
coupon 14
(i) Current yield = = = 15.56%
CMP 90
(ii) YTM can be determined from the following equation
14 × PVIFA(Periodic YTM, 10) + 100 × PVIF(Periodic YTM, 10) = 90

190
Adish Jain CA CFA
 Fixed Income Securities

Value of bond when YTM is 16% = 7 PVAF(8%, 10 periods) + 100  PVAF(8%, 10th period)
= 46.97 + 46.32
= 93.29
Value of bond when YTM is 18% = 7  PVAF(9%, 10 period) + 100  PVAF(9%, 10th period)
= 44.92 + 42.24
= 87.16
Precise YTM using Interpolation:
8 –– 93.29
X –– 90
9 –– 87.16
8−x 93.29 − 90
=
8 − 9 93.29 − 87.16
x = - 8.5367 or 8.54%
Periodic Yield = 8.54%
Annual Yield = 8.54  2 = 17.08%
Duration of the bond:
Periods (n) CF PVAF @ 8.54% DCF (W) nW
1 7 0.921 6.447 6.447
2 7 0.849 5.943 11.886
3 7 0.782 5.474 16.422
4 7 0.720 5.04 20.16
5 7 0.663 4.641 23.205
6 7 0.611 4.277 25.662
7 7 0.563 3.941 27.587
8 7 0.518 3.626 29.008
9 7 0.477 3.339 30.051
10 107 0.440 47.08 470.8
89.808 661.228
661.288
Duration = = 7.36 semi-annual periods
89.808
7.36
= = 3.68 years
2

191
Adish Jain CA CFA
Fixed Income Securities

QUESTION 32:
N 20

The following data are available for a bond :

Face Value ₹ 10,000 to be redeemed at par on maturity
Coupon rate 8.5 per cent per annum
Years to Maturity 5 years
Yield to Maturity (YTM) 10 per cent
You are required to calculate:
a. Current market price of the Bond,
b. Macaulay's Duration,
c. Volatility of the Bond,
d. Convexity of the Bond,
e. Expected market price, if there is a decrease in the YTM by 200 basis points
1. By Macaulay's Duration based estimate
2. By Intrinsic Value Method.
3. By Macaulay's Duration and Convexity Adjustment
Given:
1 2 3 4 5
PVIF (10%, n) 0.909 0.826 0.751 0.683 0.621
PVIF (8%, n) 0.926 0.857 0.794 0.735 0.681
Solution:
Year CF’s PVAF @ 10% DLF DCF  W
1 850 0.909 772.65 772.65
2 850 0.826 702.1 1,404.2
3 850 0.751 638.35 1,915.05
4 850 0.868 580.55 2,322.2
5 10,850 0.621 6,737.85 33,689.25
9,431.5 40,103.35
(a) CMP of Bond = 9431.5
40103.35
(b) Macaulay’s duration = = 4.25 years
9431.5
4.25
(c) Volatility = = 3.866
1 + 0.10
(d) Present yield = 10%

192
Adish Jain CA CFA
 Fixed Income Securities

CMP of bond (V0) = 9431.5

Change in yield (y) = 0.02 or 2%
Price of bond if yield increases by 2%
(V+) = 850  PVAF(12%, 5 years) + 10,000  PVAF(12%, 5th year)
= 850  3.605 + 10,000  0.567
= ₹ 8734.25
Price of bond if yield decreases by 2%
(V–) = 850  PVAF(8% 5 years) + 10,000  PVAF(8%, 5th years)
= 850  3.993 + 10000  0.681
= ₹ 10204.05
V+ + V− − 2V0
Convexity =
2V0  (Y )2
8734.25 + 10204.05 - 2 × 9431.5
=
2 × 9431.5 × (0.02)2
= 9.98
Convexity Adjustment = C  (Y)2 100
= 9.98  (0.02)2  100 = 0.399%
(e) Expected market price, if there is a decrease in the YTM by 200 basis points
1 By Macaulay’s Duration based estimate
Decrease in YTM = 200 bps i.e., 2%
% Increase in MP = 3.864  2%
= 7.73%
Expected MP = 9,431.5 + 7.73% = ₹ 10,160.55
2. By Intrinsic Value method
Bond Value at YTM of 8% = ₹ 10204.05
3. Macaulay's Duration and Convexity Adjustment:
 in price = - 3.864  (- 0.02) + 9.98  (- 0.02)2
= + 8.13%
Expected price = 9,431.5 + 8.13% = 10,198.28

QUESTION 33:
N 15 | RTP
193
Adish Jain CA CFA
Fixed Income Securities

Mr. A will need ₹1,00,000 after two years for which he wants to make one time necessary
investment now. He has a choice of two types of bonds. Their details are as below:
Bond X Bond Y
Face value ₹1,000 ₹1,000
Coupon 7% payable annually 8% payable annually
Years to maturity 1 4
Current price ₹ 972.73 ₹ 936.52
Current yield 10% 10%
Advice Mr. A whether he should invest all his money in one type of bond or he should buy both
the bonds and, if so, in which quantity? Assume that there will not be any call risk or default risk.
Solution:
Bond X
Year CF’s PVAF@10% DCF (w)
1 1070 0.909 972.63 972.63
Duration = 1 year
Bond Y
Year CF’s PVAF@10% DCF (w)
1 80 0.909 72.72 72.72
2 80 0.826 66.08 132.16
3 80 0.751 60.08 180.24
4 1,080 0.683 737.64 2,950.56
936.52 3,335.68
3,335.68
Duration = = 3.56 years
936.52
We know that, weighted average duration = 2
1  w + 3.56 (1 - w) = 2
2 = w + 3.56 – 3.56w
w = 0.6094
1 – w = 0.3906
According the weights is Bond X = 60.94%
Bond Y = 39.06%
Total Investments to be made = 1,00,000  PVF(10%, 2nd year)
= 82,645
Investment in Bond X

194
Adish Jain CA CFA
 Fixed Income Securities

Amount: = 82,645  61% = 50,413

50,413
No. of Bonds = = 51.82 or 52 bonds
972.73
Investment in Bond Y
Amount: = 82,645  39% = 32,232
32,232
No. of bonds = = 34.42 or 34 bonds
936.52

QUESTION 34:
N 18

The following data are available for three Bonds A, B and C. These Bonds are used by a Bond
Portfolio Manager to fund an outflow scheduled in 6 years. Current Yield is 9%. All Bonds have
Face Value of ₹100 each and will be redeemed at par. Interest is payable annually
Bond Maturity (Years) Coupon Rate
A 10 10%
B 8 11%
C 5 9%
a. Calculate the Duration of each Bond.
b. The Bond Portfolio Manager has been asked to keep 45% of the Portfolio Money in Bond A.
Calculated the percentage amount to be invested in bonds B and C than need to be purchased
to immunize the portfolio.
c. After the Portfolio has been formulated, an interest Rate change occurs, increasing the yield
to 11%. The new Duration of these Bonds are: A = 7.15 Years, B = 6.03 Years and C = 4.27
Years. Is the portfolio still immunized? Why or why not?
d. Determine the new percentage of B & C that are needed to immunize the Portfolio, Bond A
remaining at 45% of Portfolio.
Present Values at 9% for 1 to 10 Years are 0.917, 0.842, 0.772, 0.708, 0.650, 0.596, 0.547, 0.502,
0.460 & 0.4224 respectively.
Solution:
(a) Duration of Bond A
Year CFs PVF @ 9% DCF (w) w years  w
1 10 0.917 9.17 0.0862 0.09
2 10 0.842 8.42 0.0792 0.16
3 10 0.772 7.72 0.0726 0.22
4 10 0.708 7.08 0.0666 0.27
5 10 0.650 6.50 0.0611 0.31
195
Adish Jain CA CFA
Fixed Income Securities

6 10 0.596 5.96 0.0560 0.34

7 10 0.547 5.47 0.0514 0.36
8 10 0.502 5.02 0.0472 0.38
9 10 0.460 4.60 0.0432 0.39
10 110 0.422 46.42 0.4364 4.36
106.36 1.0000 6.86
Duration: 6.86 years

Duration of Bond B
Year CFs PVF @ 9% DCF (w) w years  w
1 11 0.917 10.09 0.0908 0.09
2 11 0.842 9.26 0.0834 0.17
3 11 0.772 8.49 0.0764 0.23
4 11 0.708 7.79 0.0701 0.28
5 11 0.650 7.15 0.0644 0.32
6 11 0.596 6.56 0.0591 0.36
7 11 0.547 6.02 0.0542 0.38
8 111 0.502 55.72 0.5016 4.01
111.08 1.0000 5.84
Duration: 5.84 years

Duration of Bond C
Year CFs PVF @ 9% DCF (w) w years  w
1 9 0.917 8.25 0.0825 0.08
2 9 0.842 7.58 0.0758 0.15
3 9 0.772 6.95 0.0695 0.21
4 9 0.708 6.37 0.0637 0.26
5 109 0.650 70.85 0.7085 3.54
100.00 1.0000 4.24
Duration: 4.24 years
(ii) DL = DA
6 = 0.45  6.86 + X  5.84 + (1 - 0.45 - X) 4.24
x = 36.31% : Weight of Bond B
(1 – 0.45 - x) = 18.69% : Weight of Bond C
(iii) Duration = 7.15  0.45 + 6.03  0.3631 + 4.27  0.1869
196
Adish Jain CA CFA
 Fixed Income Securities

= 6.21
 Duration of portfolio  duration of scheduled outflow
 portfolio is not immunised
(iv) 6 = 0.45  7.15 + X  6.03 + (1 - 0.45 - X)  4.27
X = 24.66% : Weight of Bond B
0.55 – X = 30.34% : Weight of Bond C

QUESTION 35:
N 16 | RTP

A Ltd. has issued convertible bonds, which carries a coupon rate of 14%. Each bond is convertible
into 20 equity shares of the company A Ltd. The prevailing interest rate for similar credit rating
bond is 8%. The convertible bond has 5 years maturity. It is redeemable at par at ₹100. The
relevant value table is as follows.
Present values t1 t2 t3 t4 t5
PVIF0.14, t 0.877 0.769 0.675 0.592 0.519
PVIF0.08, t 0.926 0.857 0.794 0.735 0.681
You are required to estimate:
(Calculation be made upto 3 decimal places)
1. current market price of the bond, assuming it being equal to its fundamental value,
2. minimum market price of equity share at which bond holder should exercise conversion
option; and
3. duration of the bond.
Solution:
(i) Current Market Price = 14  3.993 + 100  0.681
= 124.00
(ii) Minimum Market Price of Equity Shares at which Bondholder should exercise conversion
option:
124.002
Minimum MPS of Equity Shares = = 6.20
20
(iii) Duration of the Bond
Year
1 14 0.926 12.964 12.964
2 14 0.857 11.998 23.996
3 14 0.794 11.116 33.348

197
Adish Jain CA CFA
Fixed Income Securities

4 14 0.735 10.29 41.16

5 114 0.681 77.634 388.17
124.002 499.638
499.638
Duration = = 4.03 years
124.002

QUESTION 36:
RTP M 15

Suppose Mr. A is offered a 10% Convertible Bond (par value ₹ 1,000) which either can be
redeemed after 4 years at a premium of 5% or get converted into 25 equity shares currently
trading at ₹ 33.50 and expected to grow by 7% each year. You are required to determine the floor
price Mr. A shall be ready to pay for bond if his expected rate of return is 11%.
Solution:
Conversion Value of Bond = CMP (1 + 𝑔)𝑛 x Conversion Ratio
= ₹ 33.50 x (1.07)4 x 25
= ₹ 33.50 x 1.311 x 25
= ₹ 1097.96
Value of Bond if Conversion is opted = ₹ 100 x PVAF(11%, 4) + ₹ 1017.98 PVF(11%,4)
= ₹ 100 x 3.102 + ₹ 1097.96 x 0.659
= ₹ 1033.76
Value of Bond if Redemption is opted = ₹ 100 x PVAF(11%, 4) + ₹ 1050 PVF(11%,4)
= ₹ 100 x 3.102 + ₹ 1050 x 0.659
= ₹ 1002.15
Since above value of Bond if conversion is opted, is based on the expectation of growth in market
price which may or may not as per expectations. In such circumstances the redemption at
premium still shall be guaranteed and bond may be purchased at its floor value of 1002.15

QUESTION 37:
M 18 | N 09

Sabanam Ltd. has issued convertible debentures with coupon rate 11%. Each debenture has an
option to convert to 16 equity shares at any time until the date of maturity. Debentures will be
redeemed at ₹100 on maturity of 5 years. An investor generally requires a rate of return of 8%
p.a. on a 5-year security. As an advisor, when will you advise the investor to exercise conversion
for given market prices of the equity share of (i) ₹ 5, (ii) ₹ 6 and (iii) ₹ 7.10
Cumulative PV factor for 8% for 5 years: 3.993 PV factor for 8% for year 5: 0.681
198
Adish Jain CA CFA
 Fixed Income Securities

Solution:
If Debentures are not converted its value is as under:
Years CFs PVF @ 8 % DCF (₹)
1–5 11 3.993 43.923
5 100 0.681 68.100
112.023
Conversion Value of Bonds:
Market Price per share No of shares Total
₹5 16 ₹ 80
₹6 16 ₹ 96
₹ 7.10 16 ₹ 113.60
Hence, unless the market price is ₹ 7.10 conversion should not be exercised.

QUESTION 38:
N 21

B International Ltd. (BIL) has purchased 5 years 15.28% convertible debentures on 1.04.2021. The
convertible debentures will mature on 31.03.2026. Each debenture can be converted into 20
equity shares of face value of 1 at any point of time but before maturity. Debentures will be
redeemed at 100 on maturity.
The required rate of return of BIL is 10% per annum on a 5-year security.
The Reputed, a consultant has projected the following price behavior of the shares:
Period Price Range (₹)
From To Passive Most Likely Optimistic
01.04.2021 31.12.2022 4.0 4.5 5.0
01.01.2023 30.06.2025 4.5 6.5 7.0
01.07.2025 31.03.2026 3.5 5.0 5.5
BIL, as a matter of policy, rounds up the amount.
You are required to calculate
a. The break-even price at which the debentures can be converted
b. The ideal period in which BIL shall convert and dispose of the shares
Given: PVIF(10%, 5) = 0.6209
PVIFA(10%, 5) = 3.7908
Solution:
199
Adish Jain CA CFA
Fixed Income Securities

(i) The Break-even price at which Debenture can be converted shall be equivalent to Present
Value of stream of cash flows from holding debenture till maturity and it shall be computed
as follows:
PV = ₹ 15.28 × PVIFA (10%,5) + ₹ 100 × PVIF (10%,5)
= ₹ 15.28 × 3.7908 + ₹ 100 × 0.6209
= ₹ 120
₹ 120
Thus, Break Even price = = 6/- per share
₹ 20
(ii) The ideal period in which BIL should convert and dispose of share will be 01.01.23 to
30.06.25 as during this period the market price of share is most likely to exceed its Break-
even price.

QUESTION 39:
M21 | M 18 | RTP | MTP M 22 V 2

The following data is related to 9% Fully Convertible (into Equity Shares) Debentures issued by
JAC Ltd. at ₹1000.
Market Price of 9% Debenture ₹ 1000
Conversion Ratio 25
Straight Value of 9% Debenture ₹ 800
Market Price of Equity share on the date of Conversion ₹ 30
Expected Dividend Per Share ₹1
a. Conversion Value of Debenture or Stock value of bond
b. Market Conversion Price
c. Conversion Premium per share
d. Ratio of Conversion Premium
e. Premium over Straight Value of Debenture
f. Favorable income differential per share
g. Premium pay back period
Solution:
(a) Conversion Value of Debenture
= Market Price of one Equity Share X Conversion Ratio
= ₹ 30 × 25 = ₹ 750
(b) Market Conversion Price
Market Price of Convertible Debenture
=
Conversion Ratio

200
Adish Jain CA CFA
 Fixed Income Securities

1000
= = ₹ 40
25
(c) Conversion Premium per share
= Market Conversion Price – Market Price of Equity Share
= ₹ 40 – ₹ 30 = ₹ 10
(d) Ratio of Conversion Premium
Conversion premium per share
=
Market Price of Equity Share
10
= × 100 = 33.33%
30
(e) Premium over Straight Value of Debenture
Premium over straight value (₹)
=
Straight Value of Bond
1000 - 800
= = 25%
800
(f) Favorable income differential per share:
Coupon Interest from Debenture - Conversion Ratio × Dividend Per Share
=
Conversion Ratio
90- 25 × 1
= = ₹ 2.6
25
(g) Premium pay back period
Conversion premium per share
=
Favorable Income Differential Per Share
10
= = 3.85 years
2.6

QUESTION 40:
N 22 | M 14 | N 08 | RTP

GHI Ltd., AAA rated company has issue, fully convertible bonds on the following terms, a year ago:
Face value of bond ₹1000
Coupon (interest rate) 8.5%
Time of Maturity (remaining) 3 years
Interest Payment Annual, at the end of year
Principal Repayment At the end of bond maturity
Conversion ratio (Number of shares per bond) 25
201
Adish Jain CA CFA
Fixed Income Securities

Current market price per share ₹45

Market price of convertible bond ₹1175
AAA rated company can issue vanilla bonds without conversion option at an interest rate of 9.5%
Required: Calculate as of today:
(i) Straight Value of bond.
(ii) Conversion Value of the bond.
(iii) Conversion Premium
(iv) Percentage of downside/downturn risk.
(v) Conversion Parity price and also interpret the results
t 1 2 3
PVIF0.095, t 0.9132 0.8340 0.7617
Solution:
(i) Straight Value of Bond
= ₹ 85 x 0.9132 + ₹ 85 x 0.8340 + ₹ 1085 x 0.7617
= ₹ 974.96
(ii) Conversion Value
= Conversion Ration x Market Price of Equity Share
= ₹ 45 x 25 = ₹ 1,125
(iii) Conversion Premium
= Market Conversion Price - Market Price of Equity Share
₹ 1175
= - ₹ 45 = ₹ 2
25
(iv) Percentage of Downside Risk
₹ 1175 - ₹ 974.96
= x 100 = 20.52%
₹ 974.96
(v) Conversion Parity Price
Bond Price
=
No. of Share on Conversion
1175
= = 47
25

202
Adish Jain CA CFA
 Fixed Income Securities

QUESTION 41:
MTP N 23

Following information is related to the Convertible Bond of A Ltd. which is currently priced at ₹
1060 per Bond:
(1) Conversion Parity Price - ₹ 53
(2) Conversion Premium – 10.41667%
(3) Percentage of Downside Risk with respect to Straight Value of Bond – 12.766%
Calculate:
a. No. of shares on Conversion.
b. Current Market Price Per Share of A Ltd.
c. Straight Value of Bond
Solution:
a. The No. of share on Conversion
Bond Price
Conversion Parity Price =
No. of shares on Conversion
1060
₹ 53 =
No. of shares on Conversion
No. of shares on Conversion = 20

b. Market Price Per Share of A Ltd.

Conversion Price of Share - CMP of share
Conversion Premium =
CMP of share
53 - CMP
0.1041667 =
CMP
CMP = ₹ 48 per share

c. Straight Value of Bond

Market Price of Bond - Straight Value of Bond
Percentage of Downside Risk =
Straight Value of Bond
1060 - Straight Value of Bond
0.12766 =
Straight Value of Bond
Straight Value of Bond = ₹ 940 per Bond

203
Adish Jain CA CFA
Fixed Income Securities

QUESTION 42:
M 17 | N 09

P Ltd. has current earnings of ₹ 6 per share with 10,00,000 shares outstanding. The company plans
to issue 80,000, 8% convertible preference shares of ₹ 100 each at par. The preference shares are
convertible into 2 equity shares for each preference share held. The equity share has a current
market price of ₹ 42 per share. Calculate:
a. What is preference share's conversion value?
b. What is conversion premium?
c. Assuming that total earnings remain the same, calculate the effect of the issue on the basic
earning per share (A) before conversion (B) after conversion.
d. If profits after tax increases by ₹ 20 Lakhs what will be the basic EPS, (A) before conversion
and (B) on a fully diluted basis?
Solution:
(i) Conversion value of preference share
= Conversion Ratio x Market Price
= 2 × ₹ 42 = ₹ 84
(Or ₹ 67,20,000)
(ii) Conversion Premium
(₹ 100/ ₹ 84) – 1 = 19.05%
(Or ₹ 12,80,000 or ₹ 16 per share)
(iii) Effect of the issue on basic EPS
₹
Before Conversion
Total (after tax) earnings ₹ 6 × 10,00,000 60,00,000
Dividend on Preference shares 6,40,000
Earnings available to equity holders 53,60,000
No. of shares 10,00,000
EPS 5.36
On Diluted Basis
Earnings 60,00,000
No of shares ( 10,00,000 + 1,60,000) 11,60,000
EPS 5.17

(iv) EPS with increase in Profit

204
Adish Jain CA CFA
 Fixed Income Securities

₹
Before Conversion
Earnings 80,00,000
Dividend on Pref. shares 6,40,000
Earning for equity shareholders 73,60,000
No. of shares 10,00,000
EPS 7.36
On Diluted Basis
Earnings 80,00,000
No of shares 11,60,000
EPS 6.90

205
Adish Jain CA CFA
Fixed Income Securities

B. Money Market Fixed Income Securities

QUESTION 43:

RBI sold a 91-day T-bill of face value of ₹ 100 at a yield of 6%. What was the issue price?
Solution:
FV - IP 365
Yield =   100
IP n
100 − IP 365
6 =   100
IP 91
IP = 98.53

QUESTION 44:

M Ltd. has to make a payment on 30th January, 2010 of Rs. 80 lakhs. It has surplus cash today,
i.e., 31st October, 2009; and has decided to invest sufficient cash in a bank's Certificate of Deposit
scheme offering an yield of 8% p.a. on simple interest basis. What is the amount to be invested
now?
Solution:
FV - IP 365
Yield =   100
IP n
80,00,000 - IP 365
8 =   100
IP 91
IP = 78,43,558.65

QUESTION 45:

Z Co. Ltd. issued commercial paper worth ₹ 10 crores as per following details:
Date of issue : 16th January, 2019
Date of maturity : 17th April, 2019
No. of days : 91
Interest rate : 12.04% p.a
What was the net amount received by the company on issue of CP? (Charges of intermediary may
be ignored)
206
Adish Jain CA CFA
 Fixed Income Securities

Solution:
FV - IP 365
Yield =   100
IP n
10 − IP 365
12.04% =  100
IP 91
IP = 9.70857

QUESTION 46:
RTP N 11

Suppose Mr. X purchase Treasury Bill for Rs. 9,940 maturing in 91 days for ₹ 10,000. Then what
would be annualized investment rate for Mr. X and annualized discount rate for the Govt.
Investment.
Solution:
10,000 - 9,940 365
Investment Rate =   100 = 2.42%
9,940 91
10000 - 9940 360
Discount Rate = × = 2.37%
10000 91

QUESTION 47:
MTP M 18

Two companies XYZ Ltd. and ABC Ltd., each issues Commercial Paper (CP) of ₹ 5 million each
maturing in 91 days. While XYZ’s CP has credit rating of A1 the ABC’s CP has A3 from CRISIL. XYZ
and ABC CPs are issued at 7.6% and 8.5% respectively.
You are required to determine the compensation for ABC’s CP for greater credit risk. Assume
number of days a year is 365.
Solution:
FV - IP 365
Yield = 
 100
IP n
Issue Price of CP of XYZ Ltd. will be:
5,000,000 - IP 365
7.6 =   100
IP 91
IP = ₹ 49,07,022
Issue Price of CP of ABC Ltd. will be:

207
Adish Jain CA CFA
Fixed Income Securities

5,000,000 - IP 365
8.5 =   100
IP 91
IP = ₹ 48,96,239
Accordingly, compensation for higher Credit Risk shall be:
₹ 49,07,022 - ₹ 48,96,239 = ₹ 10,783

QUESTION 48:
M 18

A bond is held for a period of 45 days. The current discount yield is 6 per cent per annum. It is
expected that current yield will increase by 200 basis points and current market price will come
down by ₹ 2.50.
Calculate:
a. Face value of the Bond and
b. Bond Equivalent Yield
Solution:
FV - CMP 360
(a) Discount Yield = 
 100
FV n
Based on current discount yield:
FV - CMP 360
6=   100 ------- (1)
FV 45
Based on revised discount yield:
FV - (CMP - 2.5) 360
8=   100 ------- (2)
FV 45
Solving above two equations:
Face Value = ₹ 1000

Alternative by ICAI:
a 6% discount yield for 45 days 0.75%
b 6% discount yield for 45 days 1.00%
c Change in discount yield (a) – (b) 0.25%
d Change in Price 2.50
e Face Value of Bond (d)/ (c) 1000
(b) Bond Equivalent Yield
Using above equation (1) and (2), calculating CMP in both the cased:
CMP (at yield = 6%) = ₹ 992.5

208
Adish Jain CA CFA
 Fixed Income Securities

CMP (at yield = 8%) = 992.5 – 2.5 = 990

Bond Equivalent Yield:
1000 - 992.50 365
When yield is 6% ×  100 = 6.05
992.50 45
1000 - 990.00 365
When yield is 8% ×  100 = 8.08
990.00 45

QUESTION 49:

From the following particulars, calculate the effective rate of interest p.a. as well as the total cost
of funds to Bhaskar Ltd., which is planning a CP issue:
Issue Price of CP ₹ 97,550
Face Value ₹ 1,00,000
Maturity Period 3 Months
Issue Expenses:
Brokerage 0.15% for 3 months
Rating Charges 0.50% p.a.
Stamp Duty 0.175% for 3 months
Solution:
FV - IP
Holding period Yield =  100
IP
1,00 ,000 − 97,550
= = 2.512%
97,550
Effective Annualized = (1 + 0.02512)12/3 – 1
= 10.433%
Total Cost of Funds
Effective Annualized interest p.a. 10.433
 12  0.60
Add: Brokerage  0.15  
 3
Add: Rating Charges 0.50
 12  0.70
Add: Stamp Duty  0.175  
 3
Total 12.233
209
Adish Jain CA CFA
Fixed Income Securities

QUESTION 50:
N 12 | PM

A money market instrument with face value of ₹100 and discount yield of 6% will mature in 45
days. You are required to calculate:
a. Current price of the instrument.
b. Bond equivalent yield
c. Effective annual return.
Solution:
FV - CMP 360
(a) Discount Yield =   100
FV n
100 - CMP 360
6 =   100
100 45
IP = 99.25
100 - 99.25 365
(b) BEY =   100
99.25 45
= 6.129% or 6.13%
FV - IP
(c) Holding period yield =  100
IP
100 - 99.25
=  100 = 0.756 %
99.25
Effective Annual return = [(1 + 0.00756)365/45 – 1]  100
= [1.06299 – 1]  100
= 6.299% or 6.3%

QUESTION 51:

AXY Ltd. is able to issue commercial paper of ₹ 50,00,000 every 4 months at a rate of 12.5%p.a.
The cost of placement of commercial paper issue is ₹ 2,500 per issue. AXY Ltd. Is required to
maintain line of credit ₹ 1,50,000 in bank balance. The applicable income tax rate for AXY Ltd. is
30%. What is the cost of funds (after taxes) to AXY Ltd. for commercial paper issue? The maturity
of commercial paper is four months.
Solution:

210
Adish Jain CA CFA
 Fixed Income Securities

Calculation of Issue price:

FV - CMP 365
Yield =   100
CMP n
50,00,000 − IP 12
12.5 =  100
IP 4
IP = 48,00,000

Calculation of Total Post Tax cost (numerator):

Interest [(50,00,000 – 48,00,000)  (1 - 0.30)] 1,40,000
Cost of placement [2,500  (1 - 0.30)] 1,750
Total post tax cost 1,41,750
Amount of Available for utilisation (denominator):
Issue Price 48,00,000
Less: line of credit -1,50,000
Less: Issue -2,500
46,47,500
1,41,750 12
Cost of fund =   100 = 9.15%
46 ,47,500 4

QUESTION 52:

Wonderland Limited has excess cash of ₹ 20 lakhs, which it wants to invest in short term
marketable securities. Expenses relating to investment will be ₹ 50,000.
The securities invested will have an annual yield of 9%.
The company seeks your advice
a. as to the period of investment so as to earn a pre-tax income of 5%.
b. the minimum period for the company to breakeven its investment expenditure overtime
value of money.
Solution:
(a) Required Net pre-tax income 20,00,000  5% = 1,00,000
Expenses to be recovered = + 50,000
Gross income to be earned = 1,50,000
Back calculating ‘n’ using yield formula:

211
Adish Jain CA CFA
Fixed Income Securities

Income to be earned 365

Yield (%) =   100
Amount invested n
1,50,000 12
9 =   100
20,00,000 n
n = 10 months
(b) To breakeven its investment expenditure:
Expenses to be recovered i.e., gross income to be earned = 50,000
50,000 12
9 =   100
20,00,000 n
n = 3.33 months

QUESTION 53:
MTP N 17 | Old SM

Bank A enter into a Repo for 14 days with Bank B in 10% Government of India Bonds 2028 @
5.65% for ₹ 8 crore. Assuming that clean price (the price that does not have accrued interest) be
₹ 99.42 and initial Margin be 2% and days of accrued interest be 262 days. You are required to
determine
a. Dirty Price
b. Start Proceed (First Leg)
c. Repayment at maturity. (Second Leg)
Consider 360 days in a year
Solution:
Self-Note: Bond are traded in the market at clean price i.e., the price w/o accrued interest however
when you buy a bond at its clean price, you will have to pay the amount of accrued interest also
along with clean price. This total amount is called as dirty price.
Dirty Price = Clean Price + Accrued Interest
Accrued Interest = for the time period starting from last coupon payment date till the date for
which dirty price is calculated.

(a) Dirty Price = clean price + Accrued Interest

262
= 99.42 + 100  10% 
360
= 106.70
(b) Start Proceed

212
Adish Jain CA CFA
 Fixed Income Securities

8,00,00,000
MV of securities =  106.70
100
= 8,53,60,000
Amount of loan taken = 8,53,60,000  98%
= 8,36,52,800
(c) Repayment at maturity
Amount of loan 8,36,52,800
Add: Interest [83652800  5.65%  14/360] 1,83,804
Amount of repayment 8,38,36,604

QUESTION 54:
MTP M 19

On 30th June 2015, PNB Bank proposes to borrow a sum of Rs. 400 crores from CB Bank via Repo
@ 11.65% using 10.00% GOI Securities 2025 (face value Rs. 10,000) for a period of 14 days with a
3.00% haircut.
The current price of the securities is Rs. 9,872. The coupon dates are 30 April and 30 September.
You are required to determine:
a. Nominal Amount as well as No. of Securities to be delivered in the beginning of the Repo.
b. The cash amount to be repaid at the end of the Repo.
Solution:
(a) The GOI Security has semi-annual coupon of 30 April hence the accrual period is 1 May
2015 to 30 June 2015 i.e. 61 days. Therefore,
10 61
Accrued Interest = 10000   = ₹ 167.12
100 365
Dirty Price = Rs. 9,872 + Rs. 167.12 = Rs. 10,039.12

Dirty Price Adjusted for 3% haircut = 10,039.12 – 3% = ₹ 9737.95

400 Cr
No. of securities required = = 4,10,764 (Approx)
9737.95
Nominal Amount of Securities Required = 4,10,764  10,000 = ₹ 410.764 crore

(b) The original cash amount to be repaid at the end

14
= 400 crore  [1+ 0.1165 × ] = ₹ 401.7874 crore
365
Alternative Solution of part (a) by ICAI (having mistake):
213
Adish Jain CA CFA
Fixed Income Securities

It adjusted the haircut from the dirty price as follows and then did rest of the solution as follows:
10039.12
Dirty Price Adjusted for 3% haircut = = ₹ 9746.72
1.03
10000
Nominal Amount of Securities Required = 400  = ₹ 410.39447 crore
9746.72
410.39447
No. of securities required = = 4,21,059 (Approx)
9746.72

QUESTION 55:
M 21

The Bank BK enters into a Repo for 9 days with Bank NE in 6% Government bonds 2022
for an amount of ₹ 2 crore. The other relevant details are as follows:
First Leg Payment (Start Proceed) ₹ 2,00,06,750
Second Leg Payment (Repayment Proceed) ₹ 2,00,31,759
Initial Margin 1.25%
Days of accrued interest 240
Assume 360 days in a year.
You are required to calculate:
a. Repo Rate
b. Dirty Price and
c. Clean Price
Solution:
 No. of days 
(i) Second Leg = Start Proceed   1 + Re po Rate  
 360 

 9 
₹ 2,00,31,759 = ₹ 2,00,06,750   1 + Re po Rate  
 360 
 9 
1.00125 =  1 + Re po Rate  
 360 
Repo Rate = 0.05 = 5%
Dirty Price 1 - Initial Margin
(ii) First Leg (Start Proceed) = Nominal Value  
100 100
Dirty Price 1 - 0.0125
₹ 2,00,06,750 = ₹ 2,00,00,000  
100 100
214
Adish Jain CA CFA
 Fixed Income Securities

10003.375 = 98.75  Dirty Price

Dirty Price = ₹ 101.30
iii) Dirty Price = Clean Price + Interest Accrued
240
101.30 = Clean Price + 100   6%
360
Clean Price = ₹ 97.30

QUESTION 56:
MTP N 15

On 30th June 2015 PNB Bank proposes to borrow a certain sum of money from CB Bank for a
period of 14 days @ 12% p.a. against 13.5% GOI Securities having a face value of Rs. 400 crore
currently trading at Rs. 410 crores maturing on 30th September 2015. The coupon dates are 30
April and 30 September. You are required to determine the amount of borrowing and buy-back
price of securities.
Solution:
Cash Outflow to CB Bank on 30.04.2015 (Amount of Borrowing):
Value of security ₹410.00 Cr.
61
Interest for the period 30.4.15 to 29.6.15 [400 Cr  13.5%  ] ₹ 9.02 Cr.
365
₹ 419.02 Cr
Buyback Price of Securities
Amount of Loan ₹419.02 Cr.
14
Add: Interest for 14 days @ 12% [419.02  12%  ] ₹ 1.92864 Cr.
365
₹ 420.94864 Cr.

215
Adish Jain CA CFA
Fixed Income Securities

216
Adish Jain CA CFA