FIN622 Corporate Finance GDB 1 Solution Fall 2017

Total Marks5Starting DateMonday, November 06, 2017Closing DateMonday, November 13, 2017StatusOpenQuestion TitleGraded Discussion BoardQuestion Description

Learning Outcome:

After doing this activity, students will be able to understand the nature of relationship between bonds price and the factors affecting it.

GDB:

Theoretical literature on bonds valuation concludes that “all other things being the same, the price of a bond is an increasing function of the frequency of coupon payments”. This is somehow true in a sense that effective annual yield is higher for interest rate compounded more than once (semi-annually, quarterly, monthly) in a year. This relationship can be understood in a way that greater the number of compounding, higher will be the total coupon payment on bonds and it will have positive effect on market price of bonds. But bonds prices are not only influenced by compounding periods in a year, there are other factors playing the role such as yield to maturity, time to maturity and coupon rate. In practice, although some bonds make coupon payments on annual basis while mostly pay on semi-annual basis. It is therefore pertinent to know how frequency of coupon payments influence bonds prices.  In real world situation, bonds prices not necessarily increase with the number of times coupon payment is made within a year as suggested in theory.

Following data pertains to a 1-year corporate bond having face value of Rs.1000 offering coupon rate of 10% compounded annually and semi-annually to its bondholders selling at different prices in the bond market as given below:

 Yield to maturity (YTM) Coupon Payment Coupon rate Compounding period Present value of interest payment Present Value of par value Bond’s market price (Rs.) 6% 100 10% Annually 94.34 943.40 1037.74 100 10% Semi-annually 95.67 942.60 1038.27 15% 100 10% Annually 86.96 869.57 956.52 100 10% Semi-annually 89.78 865.33 955.11 10% 100 10% Annually 90.91 909.1 1000.00 100 10% Semi-annually 92.97 907.03 1000.00

Requirement:

Explain the relationship of bond’s market price with frequency of coupon payments by considering the factors influencing the direction (increase/decrease/no change) of relationship.

Special Note:

• No calculations or supportive working required.
• Your answer should be to the point and must satisfy the question requirement.
• Copied answer or same content with only synonyms changed from any source of internet will straight away be marked zero.

Note:

For acquiring the relevant knowledge watch the course video lectures, consult recommended books, and study additional material available online or in any other mode.

Important Instructions:

• Your discussion must be based on logical facts.
• The GDB will open and close on above specified date and time. Please note that no grace day or extra time will be given for posting comments on GDB.
• Use the font style “Times New Roman” and font size “12”.
• Your answer should be relevant to the topic i.e. clear and concise.
• Do not copy or exchange your answer with other students. Two identical / copied comments will be marked Zero (0) and may damage your grade in the course.
• Books, websites and other reading material may be consulted before posting your comments; but copying or reproducing the text from books, websites and other reading materials is strictly prohibited. Such comments will be marked as Zero (0) even if you provide references.
• You should post your answer on the Graded Discussion Board (GDB), not on the Moderated Discussion Board (MDB). Both will run parallel to each other during the time specified above. Therefore, due care will be needed.
• Obnoxious or ignoble answer should be strictly avoided.
• You cannot participate in the discussion after the due date via email.
• Questions / queries related to the content of the GDB, which may be posted by the students on MDB or via e-mail, will not be replied till the due date of GDB is over.
• For planning your semester activities in an organized manner, you are advised to view schedule of upcoming Assignments and GDBs in the overview tab of the course website on VU-LMS.