Taxmann's CRACKER | Strategic Financial Management by Taxmann

Contents E G A P

CHAPTER-WISE MARKS DISTRIBUTION

I-7

PREVIOUS EXAMS TREND ANALYSIS (MAY 2018 ONWARDS) NEW SYLLABUS

I-9

CHAPTER-WISE COMPARISON WITH STUDY MATERIAL

I-15

Chapter 1 u

FINANCIAL POLICY AND CORPORATE STRATEGY

Chapter 2 u

2.1

RISK MANAGEMENT

Chapter 3 u

3.1

SECURITY ANALYSIS

Chapter 4 u

4.1

SECURITY VALUATION

Chapter 5 u

5.1

PORTFOLIO MANAGEMENT

Chapter 6 u

6.1

SECURITIZATION

Chapter 7 u

7.1

MUTUAL FUNDS

Chapter 8 u

DERIVATIVES ANALYSIS AND VALUATION

Chapter 9 u

1.1

FOREIGN EXCHANGE EXPOSURE & RISK MANAGEMENT

I-5

8.1

9.1

S T N E T N O C E G A P

I-6 Chapter 10 u

INTERNATIONAL FINANCIAL MANAGEMENT

Chapter 11 u

INTEREST RATE RISK MANAGEMENT

Chapter 12 u

CORPORATE VALUATION

Chapter 13 u

MERGERS, ACQUISITIONS AND CORPORATE RESTRUCTURING

Chapter 14 u

STARTUP FINANCE

10.1

11.1

12.1

13.1

14.1

SOLVED PAPER CA FINAL NOV. 2020 (NEW SYLLABUS) (SUGGESTED ANSWERS)

P.1

SOLVED PAPER CA FINAL JAN. 2021 (NEW SYLLABUS) (SUGGESTED ANSWERS)

P.28

SOLVED PAPER CA FINAL JULY 2021 (NEW SYLLABUS) (SUGGESTED ANSWERS)

P.46

SOLVED PAPER CA FINAL DEC. 2021 (NEW SYLLABUS) (SUGGESTED ANSWERS)

P.57

CHAPTER-WISE MARKS DISTRIBUTION

2011 S. Chapter No.

2012

2013

2014

2015

2016

M N M N M N M N M N M N M N

Financial Policy and Corporate Strategy

Risk Management

Security Analysis

Security Valuation

16 19 26 29 13 13 22 32 12 20 26

Portfolio 5 Management

2017

2018 M

Securitization

Mutual Funds

Derivatives Analysis 14 17 18 and Valuation

10 18

Foreign Exchange 9 Exposure & 16 23 16 13 Risk Management

2020 N

2019

Dec.

4 4

8+8+8 8+8+8

8+8+8 +4

8+4

25 21 25 20 22 20 29

I-7

July

Jan.

16 20 11

2021

8+8+8 8+8+8

8+8

N O I T U B I R T S I D S K R A M E S I W R E T P A H C

I-8 2011 S. Chapter No.

Interest Rate Risk Management

Corporate 12 Valuation

Mergers, Acquisition and Corporate 13 16 14 Restructuring

2013

2014

2015

2016

2017

M N M N M N M N M N M N M N

International Financial 10 Management

2012

19 19 20 12

Start-up Finance

Note: N - November; M - May

2018 M

2019

2020

2021

Jan.

July

Dec.

4+4

PREVIOUS EXAMS TREND ANALYSIS (MAY 2018 ONWARDS) NEW SYLLABUS

l a c i t c a r P

l a c i t e r o e h T l a c i t c a r P

l a c i t c a r P

l a c i t e r o e h T

l a c i t c a r P

l a c i t e r o e h T

e c n a n i F p u t r a t S

l a c i t c a r P

s i s y l a n A y t i r u c e S

l a c i t e r o e h T

e c n a n i F p u t r a t S

l a c i t c a r P

n o i t a u l a V y t i r u c e S

l a c i t c a r P

n o i t a u l a V e t a r o p r o C

0 5 8 4 4 4 8 8 4 8 5 1

s d n u F l a u t u M

0 6 4 4 1

n o i t a u l a V e t a r o p r o C

n o i t a u l a V y t i r u c e S

t n e m e g a n a M o i l o f t r o P

l a i c n t an ne i F m le a g na on i t a a nM r e t n I e c n a n i F p u t r a t S

t n e m e g a n a M k s i R e t a R t s e r e t n I & e r u st on pe xm Ee eg ga nn aa h cM xk Ei s nR g i e r o F

s e Y

) c ) c ) a ) c ) b ) b ) b ) ) a ) d ) a a ( 4 ( 4 ( 6 ( ( ( ( 5 ( ( ( 5 ( 5 3 3 3 4 4

n o i t a u l a V d n a s i s y l a n A s e v i t a v i r e D

e t a r o p r o C g dn ni ar u nt oc i u t i r s t is u qe cR A s r e g r e M

s e Y

) c ) b ) a ) c ( ( ( ( 1 2 2 2

n o i t a u l a V d n a s i s y l a n A s e v i t a v i r e D

s e Y

) b ( 1

e t a r o p r o C dy ng ae t ya cr i t l S o P l a i c n a n i F

) a ( 1 8 y1 a0 M2

l a c i t c a r P

l a c i t e r o e h T

n o i t a z i t i r u c e S

l a c i t c a r P

n o i t a u l a V y t i r u c e S

l a c i t c a r P

4 4 8 8

t n e m e g a n a M k s i R

& e r u st on pe xm Ee eg ga nn aa h cM xk Ei s nR g i e r o F

s e s e Y Y

) c ) ) b ) a b ( 1 ( 1 ( ( 6 6

.8 v 1 o0 N2

l a c i t e r o e h T

l a c i t c a r P

n o i t a u l a V y t i r u c e S

l a c i t c a r P

t n e m e g a n a M o i l o f t r o P

l a c i t e r o e h T

n o i t a z i t i r u c e S

l a c i t c a r P

s d n u F l a u t u M

4 8 8 4 8

e c n a n i F p u t r a t S

s e Y

) c ) b ) ) a ) a c ( ( 3 ( ( ( 1 2 2 2

I-9

Category Marks Chapter Compulsory

Question No. Year

Category Marks Chapter Compulsory

l a c i t c a r P

l a c i t e r o e h T l a c i t c a r P

l a c i t c a r P

n o i t a u l a V y t i r u c e S

l a c i t c a r P

e c n a n i F p u t r a t S

& e r u st on pe xm Ee eg ga nn aa h cM xk Ei s nR g i e r o F

l a c i t e r o e h T

l a c i t c a r P

n o i t a u l a V e t a r o p r o C

t n e m e g a n a M k s i R e t a R t s e r e t n I

) c ) ) b ) b ) a ) a c ( ( 6 ( ( ( 6 ( 4 5 5 5

s u b a l l y s m o r f d e t e l e d c i p o T

2 2 1 4 4 1 8

) b ( 4

& e r u st on pe xm Ee eg ga nn aa h cM xk Ei s nR g i e r o F

t n e m e g a n a M k s i R

e t a r o p r o C g dn ni ar u nt oc i u t i r s t is u qe cR A s r e g r e M

2 8 4 1

n o i t a u l a V d n a s i s y l a n A s e v i t a v i r e D

) c ) ) a b ( 4 ( ( 3 3

Question No. Year

S U B A L L Y S W E N ) S D R A W N O 8 1 0 2 Y A M ( S I S Y L A N A D N E R T S M A X E S U O I V E R P

I-10

s u b a l l y s m o r f d e t e l e d c i p o T

l a c i t e r o e h T l a c i t c a r P

l a c i t c a r P

l a c i t e r o e h T

l a c i t c a r P

l a c i t e r o e h T

l a c i t c a r P

s d n u F l a u t u M

l a c i t c a r P

n o i t a z i t i r u c e S

e c n a n i F p u t r a t S

l a c i t c a r P

s d n u F l a u t u M

n o i t a u l a V y t i r u c e S

8 4 8 8 4 8 8 4 8 8

t n e m e g a n a M k s i R

n o i t a u l a V y t i r u c e S

& e r u st on pe xm Ee eg ga nn aa h cM xk Ei s nR g i e r o F

8 8

n o i t a u l a V e t a r o p r o C

n o i t a u l a V d n a s i s y l a n A s e v i t a v i r e D

) c ) c ) c ) ) b ) b ) b ) a ) a ) a b ( 3 ( 4 ( 5 ( 3 ( 4 ( 5 ( ( 3 ( 4 ( 2 2

n o i t a u l a V d n a s i s y l a n A s e v i t a v i r e D n o i t a u l a V y t i r u c e S

s u b a l l y S m o r f d e t e l e D c i p o T

e t a r o p r o C g dn ni ar u nt oc i u t i r s t is u qe cR A s r e g r e M

s e s e Y Y

) c ) b ) ) a ) a c ( ( 2 ( ( ( 6 1 1 1 9 y1 a0 M2

s u b a l l y s m o r f d e t e l e D c i p o T

l a c i t e r o e h T

0 8 4 1

l a c i t c a r P

4 8

l a c i t e r o e h T

l a c i t c a r P

s d n u F l a u t u M

) c ) ) a b ( 2 ( ( 1 1

e c n a n i F p u t r a t S

t n e m e g a n a M k s i R e t a R t s e r e t n I

e c n a n i F p u t r a t S

e t a r o p r o C g dn ni ar u nt oc i u t i r s t is u qe cR A s r e g r e M

s e s e Y Y

) ) a c ( ( 6 1

s e Y

l a i c n t an ne i F m le a g na on i t a a nM r e t n I

) b ( 6

& e r u st on pe xm Ee eg ga nn aa h cM xk Ei s nR g i e r o F

) ) a c ( ( 5 6

.9 v 1 o0 N2

S U B A L L Y S W E N ) S D R A W N O 8 1 0 2 Y A M ( S I S Y L A N A D N E R T S M A X E S U O I V E R P

I-11 Category Marks Chapter Compulsory

l a c i t c a r P

l a c i t e r o e h T

n o i t a z i t i r u c e S

l a c i t c a r P

n o i t a u l a V d n a s i s y l a n A s e v i t a v i r e D

l a c i t c a r P

s i s y l a n A y t i r u c e S

l a c i t e r o e h T

e c n a n i F p u t r a t S

l a c i t c a r P

n o i t a u l a V e t a r o p r o C

l a c i t c a r P

& e r u st on pe xm Ee eg ga nn aa h cM xk Ei s nR g i e r o F

6 4 8 8 4 8 8

n o i t a u l a V d n a s i s y l a n A s e v i t a v i r e D

) c ) c ) ) b ) b ) a ) a b ( 3 ( 4 ( 3 ( 4 ( ( 3 ( 2 2

Question No. Year

l a c i t c a r P

l a c i t e r o e h T l a c i t c a r P

l a c i t c a r P

l a c i t e r o e h T

l a c i t c a r P

8 8 4 8

n o i t a z i t i r u c e S

n o i t a u l a V e t a r o p r o C

4 8 8

t n e m e g a n a M o i l o f t r o P

l a c i t c a r P

l a c i t e r o e h T

l a c i t c a r P

l a c i t e r o e h T

l a c i t c a r P

l a c i t e r o e h T l a c i t c a r P

l a c i t c a r P

l a i c n t an ne i F m le a g na on i t a a nM r e t n I

l a c i t e r o e h T

l a c i t c a r P

s d n u F l a u t u M

n o i t a u l a V y t i r u c e S

) c ) ) b ) a b ( 6 ( 6 ( ( 5 5

s i s y l a n A y t i r u c e S

8 4 8 8

s d n u F l a u t u M

e c n a n i F p u t r a t S

4 8

n o i t a u l a V y t i r u c e S

) ) a c ( ( 4 5

& e r u st on pe xm Ee eg ga nn aa h cM xk Ei s nR g i e r o F

e c n a n i F p u t r a t S

dg nn ai sr u nt oc i u t i r s it s u qe cR e At ,a s r r o e p g r ro e MC

0 3 2 8 4 8 8 4 7 1 1

n o i t a u l a V y t i r u c e S

n o i t a u l a V d n a s i s y l a n A s e v i t a v i r e D

s d n u F l a u t u M

t n e m e g a n a M k s i R

n o i t a u l a V d n a s i s y l a n A s e v i t a v i r e D

) b ( 4

& e r u st on pe xm Ee eg ga nn aa h cM xk Ei s nR g i e r o F

) c ) c ) c ) b ) b ) ) a ) a ) a b ( 2 ( 3 ( 4 ( 2 ( 3 ( ( ( 2 ( 3 1 1

s e s e Y Y

) c ) b ) ) a a ( 1 ( ( ( 6 6 6

s e Y

t n e m e g a n a M o i l o f t r o P t n e m e g a n a M k s i R

l a i c n t an ne i F m le a g na on i t a a nM r e t n I

) c ( 5

e t a r o p r o C dy ng ae t ya cr i t l S o P l a i c n a n i F

) ) b ) a c ( ( ( 4 5 5

.0 v 2 o0 N2

t n e m e g a n a m k s i R

l a c i t c a r P

l a c i t e r o e h T

4 4

l a c i t e r o e h T

n o i t a u l a V e t a r o p r o C

n o i t a z i t i r u c e S

) ) Rc ) a c ( ( 1 ( O6 6

1 .2 n a0 J2

Category Marks Chapter Compulsory

l a c i t c a r P

4 8 8

l a c i t c a r P

s d n u F l a u t u M

y c i l o P l a i c n a n i F

l a i c n t an ne i F m le a g na on i t a a nm r e t n I

) ) b ) a c ( ( ( 1 2 2

Theory

) b ( 1

Question No. Year

S U B A L L Y S W E N ) S D R A W N O 8 1 0 2 Y A M ( S I S Y L A N A D N E R T S M A X E S U O I V E R P

I-12

l a c i t c a r P

Theory

l a c i t c a r P

Theory

n o i t a z i t i r u c e S s e v i t a v i r e D X E R O F

n o i t i s i u q c A d n a r e g r e M s e v i t a v i r e D

e c n a n i F p u t r a t S

n o i t a u l a V y t i r u c e S

n o i t i s i u q c A d n a r e g r e M

e c n a n i F p u t r a t S

l a i c n t an ne i F m le a g na on i t a a nm r e t n I

) c ) c ) c ) b ) b ) b ) ) a ) a ) a ) a c ( ( 4 ( 5 ( 6 ( ( ( 4 ( 5 ( ( 4 ( 5 2 3 3 3

n o i t a u l a V y t i r u c e S

2 4 4 0 6 4 8 4 8 8 4 1 1

Theory

l a c i t c a r P Practical

Theory

X E R O F

n o i t a z i t i r u c e S

l a i c n t an ne i F m le a g na on i t a a nm r e t n I

1 y2 l 0 u J2

r ) c ) ) o a b ) ( ( c ( 6 6 ( 1 6

t n e m e g a n a m k s i R

8 4 4 8

Theory

Practical Theory

Practical

Practical Theory

Practical

Theory

Practical

Theory

Practical

Theory

Practical

Theory

Theory s e v i t a v i r e D

y c i l o P l a i c n a n i F

s e v i t a v i r e D

t n e m e g a n a m k s i R

n o i t a u l a V y t i r u c e S

X E R O F

e c n a n i F p u t r a t S

s d n u F l a u t u M

n o i t a u l a V y t i r u c e S

e c n a n i F p u t r a t S

n o i t a u l a V e t a r o p r o C

t n e m e g a n a M o i l o f t r o P

n o i t a z i t i r u c e S

n o i t i s i u q c A d n a r e g r e M

n o i t a u l a V y t i r u c e S

s d n u F l a u t u M

r ) c ) c ) c ) c ) c ) c ) b ) b ) b ) b ) b ) a ) a ) a ) a ) a ) o b ) ( 2 ( 3 ( 4 ( 5 ( 6 ( c ( 2 ( 3 ( 4 ( 5 ( 6 ( ( 2 ( 3 ( 4 ( 5 ( 6 1 1 ( 6

t n e m e g a n a m k s i R e t a R t s e r e t n I

8 4 8 8 4 8 8 4 8 8 4 8 8 4 8 8 4 4

Practical

S U B A L L Y S W E N ) S D R A W N O 8 1 0 2 Y A M ( S I S Y L A N A D N E R T S M A X E S U O I V E R P

I-13 Category Marks Chapter Compulsory

l a c i t c a r P y r o e h T

l a c i t c a r P

l a c i t c a r P y r o e h T

l a c i t c a r P

y r o e h T

l a c i t c a r P

y r o e h T

n o i t a u l a v y t i r u c e S

l a c i t c a r P

n o i t a z i t i r u c e S

l a c i t c a r P

l a i c n t an ne i F m le a g na on i t a a nM r e t n I

4 8 8

s i s y l a n A y t i r u c e S

t n e m e g a n a m o i l o f t r o P

8 4 8 8 4 8 8 4 8

t n e m e g a n a M k s i R

n o i t a u l a v e t a r o p r o C

) ) b ) a c ( ( ( 4 5 5

d n a e r u st on pe xm Ee eg ga nn aa hM ck xs Ei nR g i e r o F

s d n u F l a u t u M

e c n a n i F p u t r a t S

) b ( 4

d n a e r u st on pe xm Ee eg ga nn aa hM ck xs Ei nR g i e r o F

dg n ni ar u nt oc i t u i r s t i s u qe cR Ae t ,a s rr e o gp r r e o MC

s e s e Y Y

n o i t a u l a V d n a s i s y l a n A s e v i t a v i r e D

s e Y

) c ) c ) c ) b ) b ) ) a ) a ) a b ( 2 ( 3 ( 4 ( 2 ( 3 ( ( ( 2 ( 3 1 1

n o i t a u l a V d n a s i s y l a n A s e v i t a v i r e D

) a ( 1 .1 c 2 e0 D2

Question No. Year

y r o e h T

l a c i t c a r P

t n e m e g a n a m o i l o f t r o P

l a c i t c a r P

t n e m e g a n a m o i l o f t r o P

y r o e h T

t n e m e g a n a m o i l o f t r o P

y r o e h T

4 8 8 4 4

e c n a n i F p u t r a t S

t n e m e g a n a M k s i R e t a R t s e r e t n I

R ) ) ) ) O c c a b ( ( ( ( ) 5 6 6 6 c ( 6

CHAPTER-WISE COMPARISON WITH STUDY MATERIAL Chapter Name of Chapter No.

Study Material Chapter

Financial Policy and Corporate Strategy

Risk Management

Security Analysis

Security Valuation

Portfolio Management

Securitization

Mutual Funds

Derivatives Analysis and Valuation

Foreign Exchange Exposure & Risk Management

International Financial Management

Interest Rate Risk Management

Corporate Valuation

Mergers Acquisition and Corporate Restructuring

Startup Finance

I-15

SECURITY VALUATION CHAPTER

PART 1

THEORY

srhy se su se, c. oti t edhel tt gn t r Sns upacnu e o d e t i t eb t s r n a r t y t a o ehmetes c t i vh p i mr a lp i tht r itura i s o o t Pfwne c a pn n do,evmr e h a e nf u n oae i n c ai W e l lh d y fii tla.a e v i e n b T e v t eheui ho .dt r mtcdne e i ngas dunp e n f a e o s o rr i r hms e s l vuimt iga o eootsny d h i d c t n d G t t n l e r e s n a oo ,e h moe s t krtsutBp t neeeqs.eu atcreemdb n i u v t Bir t n nr,, e k ypa i d u t ya s o dmoeg i bp r i e h n r m t t dtn fe i atoo eo l n p n u uno e y ey o m so l hu ei t l s cw da r i s r g edi seue u d h u s s p r t d t r d u a a . t m r c n r e m snaouc r e r dodwl a u r a h nbe t e eansgg e oeu i bsed r bss h nr e e n l s l oe vb yl nei i h o i l oT l ewe h sba dg r p. ni dcani a e us t oe nrhonah y p i t r e cn a eora ut e oahboh o e rptatto uv s , e ts cpi e e s t o a i s Zmdnve ry h a o ec ui nr e eo ct ezrha t r e s rn t mh na fo oI n oco at t t i

y del ere dov nmt i u a y ol t i pb t n xa er a eu sd q a i s d wn e to s i s sce s a r e p ”c x l e ae dls opi t s me i h kT dr da . s omg D n ki dc n nor ta as e me d ahe htnl : , i al a e e r t d Gde o eor hmnm T on “eno h a i eth t a hot t u tsl sgd a a nnv i eg nd dn wr i i v ooi w c nc do kA l nl o.oo sm tf l e a ihh shgt i i e yw n tb I i

Traditional approach:

) 3 / E + D ( m = P

e r a h s e h t f o e c i r p t e k r a M = P , e r e h W

e r a h s r e p d n e d i v i D = D

e r a h s r e p s g n i n r a E = E

. r e i l p i t l u m a = m

4.1

[May 2012] [4 Marks] Q.1 Write a short note on Zero coupon bonds

Ans.:

Q.2 Write a short note on Traditional & Walter Approach to Dividend Policy [May 2014] [4 Marks]

Ans.:

: s n o i t p m u s s a g n i w o l l o f e h t n o d e s a b s i l e d o m s i h T l a n o i t a r e r a s r o t s e v n I ) (

. e s r e v a k s i r n r u t y e h t , y t n i a t r e c n u f o s n o i t i d n o c r e d n U ) (

ed hnm t ae s y e m man iha t ram uro r oGf f y d obe t v ldi e a r de ui qv d eo t sro i p ssn dt d nh n ei ga de t i n v we i d em ohg t T d d.u es j hge n ci v an i t t rc t a a e j teb h u gds e i n e r i i wa e th ee hrt t on ,t o l e ddds . oees i h s mc a y l saba t i t e n h a r a t l rtaa h d e gd c di i ne r oi UwDp

t yn ba rt a s ei nd tn n ua oh ct s n i i d a t yr ee hc t ne ar ho t em t e a r r ra e s hd gn i e h d ai v ti a sd dy nb er da i e v n i d e ts n u aa t s c i e d tb n s ui oi s ch s i T. d s .d sd r onn t ee s di d e i vi v v i nd d I ene cb ah ot ft do enon hneo c t d a i e sco s t ha r omcb pres p fih i ueTt sh.I t d. rf em e o t kr l n a y fi i Wcl i r y l e o n t Ep a n nti f hneo oere Jmau hl tt ys be oa 3vbv 6n e 9idh 1ent s nhat T y i c ce .i dt f lf en daoa nvpy edc ul nl oe prei o do: e p i rr s v pa n i d o lsdni e t sep ddt d oni i m Memvu d i i ods sv r s ’ i ea f r d t e a tdi t g l a e n a htri p a Wtr w o o eearl p n l p hr i po ea Tt s f . m r i f y t i u q e l l a n a s i m r i f e h T ) (

. s t n e m t s e v n i s t i e c n a n i f o t s g n i n r a e d e n i a t e r y l n o e s u l l i w m r i f e h T ) (

.s y n t i i a u qm ee fr o k ti s s or s cs ee hn t i s su i ob st , dn ne am ts t n e av t s n ni l oa cn so i i ti t n d ed ma ty s e r e vv ne i nh oi t nw rt ua t h e t r fs. n o d eae e t r a mt e r l sa ei hh n TTu ) ( . y l l a n r e t n i d e n i a t e r r o d e t u b i r t s i d r e h t i e e r a s g n i n r a e l l A ) (

. e f i l g n o l y r e v r o l a u t e p r e p a s a h m r i f e h T ) (

. m r i f e h t f o e f i l e h t r e v o e g n a h c t ’ n o d s d n e d i v i d d n a s g n i n r a E ) (

e u l a v t n e s e r p e h t f o m u s e h . t s s d i n e e r d a i h v s i a: d e fs r o m u ea t ce u i r f r pt t s n tw a e t ko s r fl n a o h c ms ea f hc o t o m tw a a ht e t g t r dn s ei e uw t o i gl n r l i a o f f n re I e t h . l t a f Wo

. efe s hobmg r t t l fi n i nsl n e eoih r ecwt a sh, wt e c ee ti i k e h dh bn t wne a pa i h t y h ) t u c sr i r b n(l i e r onot t p i a r s t e u i a d r d t l ng e e t r es r s afdiu i sovrm i f i ed I t t ea i . , r ) e e m r e k k ha lu( n t a tnmdh n a ri ta t hep t t s ) o n s r ei ( e s n l sa i ns t mi e i e er erv r f wi a poh td t e en n hel dba t m ns u nt oog i os t n w e a i dv l n e en r mr s ir a a e b s fie e ’ h smeth i r h y t l fi Tbn e i d .da oa) et e e mnknr ( o i rnlmd a e l r r t t u i e l up o t a t aeh e Wr cds

. s n i a g l a t i p a c f o m a e r t s e t i n i f n I .

N O I T A U L A V Y T I R U C E S

4.2

Walter approach:

t neoc r i t e e g eh l l gt n o i n, c d rr ae o hv o t ce cr o e ct gwas ao e n H t ov n i .t n es ai ct er n r aua e prdy tfb es eon hr t e etk p st ea a nc t dine enom nici fie t egee dnmg a i a ehtr e bch e ttv nn a ai e co h p nsnt i t os ou i i t a t b a ba r g u0rn d0ui d 1 h fa ft o o o rtn to ps p efei cdcn no nn i o oo t ca cb r e ru haed h f To t h o en c i ca i h r sw pi

Q.3 Why should the duration of a coupon carrying bond always be less than the time to its maturity? [May 2009] [3 Marks]

Ans.:

i.e.

N O I T A U L A V Y T I R U C E S

.o trt en enr ue f l ee f a vmomZ t l ts ua l i n e f r wt ev o s s n t n n e i n i r o r e i pe et mha eh t r t h/ s fu t s e o d ei v vhn y e i t fii e h coer T u eth . t r r t n oa,ao . p m t y d i t t e i o a er i marh r ue isut t e t vandp ei y e m a ge t h h ac i t et r r er e u ret vroe ba arfs doesdm t b l e s ee s slut t o e l h va i bwo gnv i i d t r r e l e wnels u t a a n os u efi eq w hi l c t ,e , fi he se s ic i ty r c to eiaa I f . phrw e t swnl r n eennoa s mhoopi u i to tTea d s .mrc e n vdiueo n t no dhb i t e er rbh n e o ethe hh hp rtg /t e miu s vi o fo i h hHc o .ea .s lds ss t e hini e e i t can r r fa a o nn a ehheasp s s s hnrm e a e g w fid o hsn l f o c cei o d h d h r ede e utnt h pfaport eotoha, r ssdthr t e s e a eru e v . hd se osmt s t e lfiai w so r t o o i s nh oa ,itH rs ae h k e eh s beck.f c c mt d a r balo somu b o u t k e oy hc r o yns ug a a yb e e e b hn ehre so oh t h y fm shttu o n y s a T b e n knic .a r nfs cr r a e au o o o i cphf be t t s c wrmsn y u r o u uooceo o h d fl s t bt i e t e t e i edru hmd hn ort a h n e Tar sh sse o a e yo c vcltl nf b m a lta a pdonn og v e e r e ef mgni l onic e c a s fih e m c s s f aheuiao h c h s yxcswc o s ber l a fi grl ss iph uu n p e s r yi f hi r o a h n st e t o ha ae t sc ep se n r i necmg e v n f whi a onf oTS ceoh : a l u m r o f g n i w o l l o f e h t y b n e v i g s i o i t a R E / P

Market Price of the Share Earnings per Share P/E =

se i r h a t h nS I .e r s e P r a s hg sn i fn o r ra e bE e mh ut nn i ee hs t i sr e ca s ui de er r e yh nt , at pn mt a os cn eo hc t n yi ba sm e e r r a s hg sn fn i o kr ca ae e bh . yt S uf P bi eE es ha Tc

e r e h t , s u h T . s e s a e r c n i y l l a r e n e g e. r S a hP sM e h t fe o r a eh cs i r f po te e c ki rr a p mt e ek hr t a ,M k cn ai be ys a ue br rc e n t i f s Ai

t. s c r ao pt mc ia ef ho t w , t e s e a h et r n c i ne i s oa t e dr nc ei n t ae l v u i t ma l re or f ef ho t m nu i t rn oa t a u nq i e mh ot nn eo dp du nd an re op t a e r d e l l mi uw nE e/ hP t sn Ao i.e.

PART 2

NUMERICAL PROBLEMS:

BOND VALUATION

Q.1 An investor is considering the purchase of the following Bond:

` 100 11% 3 years

Face Value Coupon rate Maturity

4.3

Q.4 Write a note on buy-back of shares by companies and what is the impact on P/E Ratio upon buy-back of shares? [Nov. 2019 (Old Syllabus)] [4 Marks] Ans. Buy-Back of Shares:

Impact of Buy-Back on P/E Ratio:

i.e.

N O I T A U L A V Y T I R U C E S

4.4

(i) If he wants a yield of 13%, what is the maximum price he should be ready to pay for?

(ii) If the Bond is selling for ` 97.60, what would be his yield? [Nov. 2009] [4 Marks] Ans.:

sr a o t ls l e e v wn si a e h tt s e e r c e i t r n p i hm t u o bm i gx na i s m i r e ph mt os ci ( % s3 w1 ot l a f n d i e t en r uu t o. u cy fs ia fd p o )o ee t uu l y l a a d vv a tne n r oe ei s t b e p r d pml eu ed o he w Tr (i) Calculation of Maximum price

0 0 1 . s s r R a e = Y 3 =

1 1 . s R = × 0 0 1 . s R =

. 7 2 . 5 9 . s R s i y a p o t y d a e r s i r o t s F e I v V n P 3 i 9 e 0 6 h 0 . 7 t 1 0 . 2 t × 5 a h + 0 9 t 0 e 1 = c i 0 r 3 p A + . 1 9 m F 6 6 u I 3 + m V . P 2 i 7 x × × 9 a . 1 1 5 1 1 2 m e h = = = T `

s ss yi l e e dl s ne r e ob vb ne l l i i hw et r n fr a i n,u s rn t e ua r t ee e r mh / t dI t, l 0 e .6 i d y . l 7 e di 9 ny. a%s d3R n1t ota bae u 8l f2 o a . e5v c9i r i .a r psf R s esi hi h t et tu n a la ha h t vt di rr ea e t fh o g nei hh eT . t% b. a 3 yd 1 g e at nn i ma l a l l e e h tr s I t

: d l e i y e t a m i x o r p p a t u o d n i f s u t e L

Redemption Value − Net Proceeds Maturity Period Redemption Value + Net Proceeds 2

= ) . p p a ( M T Y

Interest +

Rs. 11 +

s a l l e w s a t s e r e t n i h t o b g n i s i r p m o c ( s w o l f n i e r u t u f f o e u l a v t n e s e r p e h T

F I V P × 0 0 1 +

+ 2 4 . 6 2

= =

+ 2 0 4 . 2 × 1 1

2 A 1 2 F . 7 6 I . V 0 7 P × 9 × 0 1 0 = 1 1 0 2 . 1 7

= % 2 1 t a e u l a V

% 4 9 . 1 1 r o 4 9 1 1 . 0 =

(Rs .100 − Rs .97.60) 3 (Rs .100 + Rs .97.60) 2

(12%,3)

(13%,3)

s a d e t a l u c l a c e b n a c s w o l f n i e r u t u f f o e u l a v t n e s e r P , y l g n i d r o c c A Maturity Period (n)

11 100

Annual Interest (I)

Redemption Value (RV)

(ii) Calculation of yield

N O I T A U L A V Y T I R U C E S

[Nov. 2019 Old Syllabus [5 Marks]] n e v i G

% 0 1

0 0 1 . s R

0 1 1 . s R

e u l a V e n t o e a i u t r l p n a o v m p e e d u c e o a C F R

. s r s y i d 5 l e i y d e r i u q e r f i d n o b e h t f o e u e l f a i V L ) I (

Value of Bond

Calculation

ee 4 9 1 9 c b 8 . 3 . 2 . 1 il . 4 0 6 2 ri l 1 1 0 0 pw 1 1 1 1 t . . s . . s s d s s e R R R R h n o gb = = = = i 1 0 1 3 he 3 2 eh 9 . 5 . . . 4 1 8 5 t 7 7 6 6 hf t + + + + ,o e 3 9 0 6 r e 9 . 8 . 9 . 9 ou . l 9 8 7 6 fa 3 3 3 3 ev r e e hh ] ] % %T t ] %] % 1 0 1 1. e s s 8 9 ds r r s s r r Y Y Y Y 5 5e a F 5F 5F F t c a I I I I n l V V V V ee v P P P P ri [ [ [ [ yg 0 0 0 0 e l 1 1 1 1 s e 1 1 1 1 r h + + + + et n ] %] %] %] %v I n 0 1 8 9 1 1i . r r r r d. Y Y Y Y ee l % F 5I F 5I F 5I F 5r i8 I V V V V ays ti P P P P ds [ [ [ [ l d e el 0 0 0 0 i e wi 1 1 1 1 y oy dl n nee hh % % at % % 0 1 e 8 9 1 w t 1 c iat r s ee pb h lg ) v ) el ) i i ) i i hii i i i ( ( ( ( Twh ) I I (

Required Yield

e h t f o M T Y e h t , e r o f e r e h T . 0 6 . 7 9 `

f o e c i r p e h t o t l a u q e . t% s o2 m1 le a b sd i l eu uo l a w vd sn i h o Tb

Ans:

5 0.681 0.650 0.621 0.593 4 0.735 0.708 0.683 0.659 3 0.794 0.772 0.751 0.731 2 0.857 0.842 0.826 0.812 1 0.926 0.917 0.909 0.901 Year PV Factor @ 8% PV Factor @ 9% PV Factor @ 10% PV Factor @ 11%

4.5

Q.2 The Nominal value of 10% Bonds issued at par by M/s SK Ltd. is Rs. 100. The bonds are redeemable at Rs. 110 at the end of year 5. (I) Determine the value of the bond if required yield is : (i) 8%

(ii) 9%

(iii) 10%

(iv) 11%

(II) When will the value of the bond be highest ? Given below are Present Value Factors :

Q.3 Calculate Market Price of:

(i) 10% Government of India security currently quoted at ` 110, but interest rate is expected to go up by 1%.

N O I T A U L A V Y T I R U C E S

4.6

(ii) A bond with 7.5% coupon interest, Face Value ` 10,000 & term to maturity of 2 years, presently yielding 6%. Interest payable half yearly. [Nov. 2010] [5 Marks] Ans.:

: % 1 y b p u o g d l e i y t n e r r u c n e h W

% 9 0 . 0 1 = 1 + % 9 0 . 9 = % 1 + d l e i Y t n e r r u C = d l e i Y d e t c e p x E : % 9 0 . 0 1 f o d l e i y a t a e c i r p t e k r a m w e n f o n o i t a l u c l a C 0 0 1 × ) e c i r P t e k r a M / t s e r e t n I n o p u o C ( = d l e i Y 0 0 1 × e c i r P t e k r a M / 0 1 = 9 0 . 0 1 r O

, s w o l f n i e r u t u f f o ee . uu l l a va tv n n eo s i t e p r pm ee hd t e er bs la l a l l he sw ds na ot bs e er he t t fn o i es cs e i r i pr tp e m ko rc a mh c ei hh Tw

5 7 3 . s R = ×

F I V P × 0 0 0 , 0 1 +

= 5 8 8 , 8

9 7 2 , 0 1

+ 4 9 3 , 1

0 0 0 , 0 1 . s R =

A F I V P × 5 7 3

l l i w d n o b e h t e r o f e r e h t , ) % 6 ( . M0 T0 0 Y, 0 n1 a. hs t rR e e hv go i b h sa i ) % 5m . 7 u ( i nm oe pr up ot ca eg hn t i l ,l e e cs ne i S b

i.e.

d a e r p s % 3 + e t a r l l i b T y a d 4 6 3

Discount rate

d a e r p s % 2 + A A A

d a e r p s % 3 + A A A

A A A A A A

Credit rating

× 0 0 0 , 0 1 . s R =

s r a e Y f l a h 4 r o s r a e Y 2 = Redemption Value (RV)

(3%,4)

) 5 8 8 8 . × 0 0 0 , 0 1 ( + ) 1 7 1 7 . 3 × 5 7 3 ( =

6 12 7.5 100

Half-yearly Interest (I)

(3%,4)

= e c i r P t e k r a M YTM (r)

y l r a e y f l a h % 3 r o . a . p % 6 = Maturity Period (n)

1 1 . 9 9 = e c i r P t e k r a M w e N

% 9 0 . 9 = 0 0 1 × ) 0 1 1 / 0 1 ( = 0 0 1 × ) e c i r P t e k r a M / t s e r e t n I n o p u o C ( = (i) Current yield:

(ii) Market Price of Bond:

Market Price = P.V. of Interest + P.V. of Principal

Tutorial Note:

Q.4 Based on the credit rating of the bonds, A has decided to apply the following discount rates for valuing bonds:

N O I T A U L A V Y T I R U C E S

4.7

He is considering to invest in a 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 per cent per annum 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 per cent). You are required to calculate: (i) The intrinsic value of the bond for A. Should he invest in the bond? (ii) The Current Yield (CY) and (iii) The Yield to Maturity (YTM) of the bond.

[Nov. 2011] [8 Marks]

Ans.:

u l a v r o f e t a r t n u o c s i d e t a i r p o r p p a e h t , n o: i s t i s e A ur qo ef hd t n no i nb ed vt e i g a er l A b aA t e rh e t pg sn Ai

(i) Calculation of Intrinsic Value of the bond:

% 4 1 = % 2 + % 3 + % 9 = M T Y : e r a s r e t e m a r a p r e h t o e h T 0 5 1 . s R = 0 0 0 , 1 . s R f o % 5 1 =

eA u. l r a vM , co i s S n. i d re t n c i i r ep hr t e nd an hu t s i sd s e n l o sb i )e 6 h F 8t . I , 5 V e 2 4 r P 9 0 o , f × 1 6 1 3 e 5 . .r 0 . 4 s e 0 0 3 Rh 0 0 ( , × 1 T , 1 e. 0 ud 0 l 0 n a + , = o 1 v . bd 0 t 4 e en + . k ho 9 A 1 1 rtb a f 3 5 m F 3 e o I h )t V 4 P . + t6y 3 n 3 6 e. u 4 × × 9 r b 3 . r 0 0 4 0 d , 5 5 1 u1 l 1 1 5 c. u e o s hR h = = = T( s

s a d e t a l u c l a c e b n a c s w o l f n i e r u t u f f o e u l a V c i s n i r t n I , y l g n i d r o c c A

Maturity Period (n)

s r a e Y 5 =

Redemption Value (RV)

0 0 0 , 1 . s R =

Annual Interest (I)

(14%,5)

% 2 6 . 4 1 = 6 8 . 5 2 0 , 1 / 0 5 1

Current yield

= e c i r P / t s e r e t n I l a u n n A =

(ii) Calculation of Current Yield (CY):

e r o f e r e h t , r a p t a e l b a. 0 m0 e0 e, d1 es . r sR i e db nl l oi bw d nM aT %Y 5% 15 s1 i t ea t d a r n no ob pe uh ot cf o ee hc t i ,r e cp ne i h S t

(iii) Calculation of Yield to Maturity (YTM):

Value (Rs.)

34.36 − 25.86 × 34.36

YTM at Rs. 1025.86 can be calculated using interpolation as per the manner given below.

) % 4 1 % 5 1 (

+ % 4 1 =

s i M T Y e 6 h t 0 3 , 0 . n 4 0 3 o , 0 i 1 , t 1 a l o p r e t % % n 5 4 i 1 1 y B

Yield

N O I T A U L A V Y T I R U C E S

4.8

% 7 4 2 . 4 1 = %

+ % 4 1 =

8.5 34.36

Q.5 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 Rs. 2.50. Calculate (i) Face Value of the Bond (ii) Bond Equivalent yield.

[May 2017] [4 Marks]

e h t f i d n o b e h t f o e c i r P

(i)

1 . e R e b d n o b f o e u l a v e c a F e h t t e L

Ans.:

% 8 s i d l e i y t n e r r u c

% 6 s i d l e i y t n e r r u c

Formula

45   8 100 × 360   

5 2 9 9 . 0 =

0 0 9 9 . 0 =

45   6 100 × 360   

 discount rate days to maturity  ×   100 360  

l aa su i t c sa e t e a h r t tf s i e , r d e t o n h i t ne i m ey s r a a et r i c n nu i sg i n s i a y bp l 0p 0a 2y ob t , e er uo df e er ce i h r pT . d5 n2 o0 b0 . n0 i . ee cR nf eo r e e f s f i a d e r ec he Td 0 0 0 , 1 . s R = d n o B e h t f o e u l a V e c a F d l e i y t n e l a v i u q E d n o B

(ii)

0 0 0 , 1 . s R =

e b l l i w d n o b e h t f o e u l a v e c a f e h t 0 5 . 2 . s R s i e c n e r e f f i d

2.5 ×1 0.0025

e h t f i d n o b e h t f o e c i r P % 8 s i d l e i y t n e r r u c

% 6 s i d l e i y t n e r r u c

0 0 . 0 9 9 = 0 0 9 9 . 0 × 0 0 0 , 1

1000 − 992.50 360 × × 100 992.50 45

1000 − 990 360 × × 100 990 45

) Y E B ( d l e i Y t n e l a v i u q E d n o B

0 5 . 2 9 9 = 5 2 9 9 . 0 × 0 0 0 1

0 0 0 , 1 . s R s i e u l a V e c a F n e h W = Y E B

% 8 0 . 8 =

% 5 4 0 . 6 =

FV − V 360 × × 100 V Days to Maturity

Q.6 Bright Computers Limited is planning to issue a debenture series with a face value of ` 1,000 each for a term of 10 years with the following coupon rates: Years 1-4 5-8 9-10

Rates 8% 9% 13%

N O I T A U L A V Y T I R U C E S

4.9

The current market rate on similar debenture is 15% p.a. The company proposes to price the issue in such a way that a yield of 16% compounded rate of return is received by the investors. The redeemable price of the debenture will be at 10% premium on maturity. What should be the issue price of debenture? PV @ 16% for 1 to 10 years are: .862, .743, .641, .552, .476, .410, .354, .305, .263, .227 respectively. [May 2016] [5 Marks] t s e r . e e t r n u i t fn o e eb ue l d a f vo tn n ei o s t e p r pm fe o d e mr uf so ee hl u t a ev bt ln l i e ws e sr e p r ud t n n a es br ea de ey h0 t 1 fg o n er i cu i r pd s et un se s i m ey ha Tp

Ans.:

0 0 1 , 1 . s R = ) r a e Y h t 0 1 s ( r a e Y 0 1 % = 6 1 =

Interest

0 3 1 . s R = % 3 1 @ 0 0 0 , 1 . s R = ) s r a e Y 2 t x e N (

Interest

0 0 9 8 . . s s R R = = % % 8 9 @ @ 0 0 0 0 0 0 1 , , 1 . . s s R R = = ) ) s s r r a a e e Y Y 4 4 t t x s e r N fi ( (

Interest

Redemption Value Maturity

de ob i d r l e pu eo hw t t i t, u e r oo hf ge ur oe rh hT t . tn n o at i t s s ne ou cq te. o hm ntr o nf ei r n r a a tel v r u i a g b pe a t tr s ag e n si r r e w t o t n o c i l l eao f he f t e uh fl o at svn wti e onv e fls l ne o i rs hpo set a r che t t edt hn e Tab

YTM

6 9 . 8 6

4 4 . 9 5

3 4 7 . 0

8 2 . 1 5

1 4 6 . 0

6 1 . 4 4

2 5 5 . 0

4 8 . 2 4

6 7 4 . 0

0 9 . 6 3

0 1 4 . 0

6 8 . 1 3

4 5 3 . 0

5 4 . 7 2

5 0 3 . 0

9 1 . 4 3

3 6 2 . 0

1 5 . 9 2

7 2 2 . 0

0 7 . 9 4 2

7 2 2 . 0

0 0 1 , 1

(RV)

PVF @ 16% 2 6 8 . 0

Cash outflow (Rs.) 0 0 0 0 0 0 0 0 0 0 3 3 8 8 8 8 9 9 9 9 1 1

0 0 1 2 3 4 5 6 7 8 9 1 1

Years

. 9 2 . 6 7 6

f o e c i r p a t a s e r u t n e b e d e h t e u s s i d l u o h s y n a p m o c e h T

676.29

` Q.7 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. (i) Assume that the yields of both the bonds fall to 6%, whether the price of bond will increase or decrease?

N O I T A U L A V Y T I R U C E S

4.10

(ii) 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? [May 2009] [8 Marks] (i)

ot h t i sw l l a d f n do l b e i e y h et f ho t ee ci c nr i p S n .i d e es t a a l e e r r c yn l i e e s . h r r e e T v. h e ns g i i a h ee r e r a b c di nl l l i e l w i l i y d dwo s nd i r an e dop nby ofi t bo r feu o t ca i er cpm i e r r phe t h e, g h% i T6h

Ans.:

If yield falls to 6% `

(6%,5)

Increase in price

9 2 . 4 8 0 , 1

9 2 . 4 8 . s R

0 3 . 7 4 7 + 9 9 . 6 3 3 = ) F 3 I 7 V 4 P . 7 × 0 0 × 0 0 0 0 , 1 0 , 1 + ( + ) 4 2 1 2 . 4 × 0 8 ( = =

A F I V P × 0 8

Price of 5 years bond

` `

9 3 . 9 2 2 , 1

(6%,20)

Increase in price 9 3 . 9 2 2 . s R

0 8 . 1 1 3 + 9 5 . 7 1 9 = ) F 8 I 1 V 1 3 P . × 0 0 × 0 0 0 0 , 0 1 , 1 + ( + ) 9 9 6 4 . 1 1 × 0 8 ( = =

A F I V P × 0 8

Price of 20 years bond

) (

(ii) Price increase in Bond: a Due to change in the present value of bond’s principal amount: F I V P [ × l a p i c n i r P =

0 ] ). 7 5 , 6 % 86 . F (s I V R P = ] − )6 5 ,0 % 8 66 ( . 0 3 7 4 7 . 0 [ × 0 0 0 , 1 =

Price of 5 years bond

Percentage Increase Rs. 66.70 × 100 = 79.13% Rs. 84.29

F I V P [ × l a p i c n i r P =

] )0 03 2 ,. % 87 9 F (s . I V R P = − ] )5 0 24 , 1 % 62 ( . 0 8 1 1 3 . 0 [ × 0 0 0 , 1 =

Price of 20 years bond

Percentage Increase % 2 4 . 2 4

) (

Rs. 97.30 × 100 = Rs. 229.39

b Due to change in the present value of bond’s Interest amount: ] )9 5 , 5 % 8. 7 A (1 F . I s V R P = − ] )7 5 , % 2 69 A (. 9 F 3 I V 4 P 2 [ 1 × 2 . t 4 s [ e r × e t 0 n 8 I = =

Price of 5 years bond

Percentage Increase Rs. 17.59 × 100 = 20.87% Rs. 84.29

] )4 01 2. , % 82 3 A (1 F . I s V R P = − ] )1 0 28 , % 61 8 A (9 . F I V 9 9 P 6 [ 4 × . 1 t 1 s e [ r × e t 0 n 8 I = =

Price of 20 years bond

Percentage Increase Rs. 132.14 × 100 = 57.58% Rs. 229.39

N O I T A U L A V Y T I R U C E S

4.11

Tutorial Note: The segment of increase in the price of the bond due to interest part is higher in case of bond with higher maturity. Q.8 Pet feed plc has outstanding, a high yield Bond with the following features: £10,000 10% 6 years Company can extend the life of Bond to 12 years.

Face value Coupon Maturity period Special feature

Presently the interest rate on equivalent Bond is 8% (a) If an investor expects that interest will be 8%, six years from now then how much he should pay for this bond now. (b) 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 company extends the life of bond another 6 years [RTP Nov. 2018] ny a op i t a o r t uy dd ea he t r d ne eb t d x l eu to o nw r lo l i t ws e yv nn ai pe mh ot ct n eu ho t , m % 8a sm i eu t a m r i tx s a e m r e t e n h i t td n en r a r ud: cne eob hBl l t i fw fo I ) (

Ans.: a

) 6 , % 8 ( F I V P 0 3 0 6 0 . 0 0 , 0 1 × 0 0 + 0 , ) 0 6 , 1 % 8 + ( 3 A 2 F 6 I . V 4 P × 0 0 0 0 0 0 , , 1 1 = = £

3 2 9 , 0 1 =

0 0 3 , 6

+ 3 2 6 , 4 =

£ £ £ £

n o i t a r u d e h t d n e t x e l l i w e sb e i l n l ai pw md on co eB f ho t ,e % u 2l 1a sv i e eh t t a r r ta s e e y r e x i t s n i r te n t f eA r r . ud cn eo hB t f fo I ) ( b

7 0 5 . 0 × 0 0 0 , 0 1

+ 1 1 1 . 4 × 0 0 0 , 1 =

0 7 0 , 5

+ 1 1 1 , 4 = 1 8 1 , 9 =

) 6 , % 2 1 ( F I V P 0 0 0 , 0 1

+ ) 6 , % 2 1 ( A F I V P 0 0 0 , 1 = £ £ £ £

2 4 7 , 1 = 3 2 9 . 0 1 1 8 1 , 9

= n i a g l a i t n e t o P

2 4 7 , 1 e b l l i w s s o l l a i t n e t o p , s u h T

Q.9 On 31st March 2013, the following information about bond is available: Name of security

Face value

Maturity Date

Coupon Rate

Coupon date(s)

Zero coupon

10,000

31st March 2023

T-Bill

1,00,000

20th June 2013

10.71% GOI 2023

100

31st March, 2023

10.71

31st March

10% GOI 2018

100

31st March, 2018

10.00

31st March & 31st October

N O I T A U L A V Y T I R U C E S

4.12

i. If 10 year yield is 7.5% p.a., what price the Zero coupon Bond would fetch on 31st March 2013? ii. What will be the annualized yield if the T-Bill is traded @ Rs. 98,500? iii. 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)? iv. 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)? [May 2015][8 Marks] : 3 1 0 2 . 3 . 1 3 n o d n o b n o p u o c o r e Z f o e c i r P ) (

Ans.:

% 6 8 . 6 = 0 0 1

2 3 6 4 . 0 × 0 0 1 + 1 0 1 7 . 6 × 1 7 . 0 1 = 2 3 . 6 4 + 7 8 . 1 7 = 9 1 . 8 1 1 . s R = ) 0 1 , % 4 ( F I V P 0 0 1 + ) 0 1 , % 4 ( A F I V P 5 )

(

6 5 . 7 6 + 6 5 . 0 4 = 2 1 . 8 0 1 . s R =

6 5 7 6 . 0 × 0 0 1 + 1 1 1 . 8 × 5 =

) 0 1 , % 8 ( F I V P 0 0 1 + ) 0 1 , % 8 ( A F I V P 1 7 . 0 1 )

(

iii

1,00,000 − 98,500 365 × × 98,500 81

F − P 365 × × P M

0 0 1

l l i B ) 0 T 1 , % n 5 o 2 . 7 5 d ( l 8 e F 4 i . I y V 0 d 2 P × 5 e z 0 0 8 i l 0 0 , a 4 0 , 0 . , u 0 0 s n 1 1 R n = = = A ) (

YTM AND DURATION OF THE BOND Q.10 Consider a bond selling at its par value of ` 1,000, with 6 years to maturity and a 7% coupon rate (with annual interest payment). (a) What is bond’s duration? [May 2009] [6 Marks] (b) If the YTM of the bond in (a) above increases to 10%, how it affects the bond’s duration? And why? [3 Marks] ) (

Ans.: i Determination of Duration of the Bond: : n e k a t e b o t e r a s p e t s g n i w o l l o f e h T

N O I T A U L A V Y T I R U C E S

eM cT i r pY ee hh t t de r no af ,e r r a e ph tt a r ea l p b at ma g en ei dl l ee r s ss i i dd nn oo bb de nh at %e . 7i . s0 i 0 e0 t , a 1 r n. os pR us oi d cn . eo % hb 7 t e ,eb e h ct l l nf i i S ow

oe t b so e t ke ar t a ts i ew o ml if t h es ha t c ff o o es ge au r l e a vv at n de es t e h r gp i e e wh eT hy . t e sn i do nm o ) . bsw ’ r o( at s fs t o eh g nvi n oi e i w t e a hs r t a un dr n e euk t he a Tr t

2 1 6 . 3 1 2

3 0 4 . 3 5

9 2 6 7 . 0

5 5 . 9 4 2

0 1 9 . 9 4

0 3 1 7 . 0

0 0 1 4 , 9 5 . = 7 7 2 4

9 9 . 2 1 7

3 6 6 6 . 0

s r a e Y 0 1 . 5 =

y t i r u t e a t a m r n o p u o C = c o t d l e i Y = y

) . x o r p p a ( s r a e Y 0 1 . 5 = 5 5 8 1 . 0 1 7 5 8 2 . 5 1 = ) (

1.07 1.07 − 0.07 0.10505

e u l a v t n e s e r P n i s e g n a h c t p e c x e t r a p t s r i f o t r a l i m i s e r a s n o i t a l u c. l s a r co t ec ha Tf

ii Effect of increase in YTM on duration of the Bond:

3 2 4 . 1 7 1

1 4 1 . 7 5

3 6 1 8 . 0

= n o i t a r u D

1 + y (1 + y )+ Period (c − y ) − Period y c [(1 + y ) − 1] + y

6 7 2 . 2 2 1

8 3 1 . 1 6

4 3 7 8 . 0

Where,

Formula method

∑ad

∑d = 1, 000

2 2 4 . 5 6

6 4 3 9 . 0

Rs. 5,100 Rs.1,000

∑ad ∑d

1 + 0.07 (1 + 0.07) + 6(0.07 − 0.07) − 6 0.07 0.07 (1 + 0.07) − 1 + 0.07  

Duration

) V R + 0 0 0 0 0 I 7 7 7 7 7 ( 0 7 0 1 1 2 3 4 5 6 (a)

Weighted Time Purchase Price

Duration

Weighted Time (`) [(a)×(d)] (e) PV of cash flows (`) [(b)×(c)] (d) PVIF@ YTM 7% (c)

Cash flows(Rs.) Interest (b) Year

4.13 Step 1 : Calculation of YTM (Yield to maturity).

Step 2 : Calculation of Duration.

Alternative Method for determination of Duration:

N O I T A U L A V Y T I R U C E S

4.14 Year

6 9 6 . 5 1 1

8 4 8 . 7 5

4 6 2 8 . 0

3 7 7 . 7 5 1

1 9 5 . 2 5

3 1 5 7 . 0

0 4 2 . 1 9 1

0 1 8 . 7 4

0 3 8 6 . 0

5 1 3 . 7 1 2

3 6 4 . 3 4

9 0 2 6 . 0

9 0 . 4 2 6 3

5 1 0 . 4 0 6

5 4 6 5 . 0

Rs. 4369.751 Rs. 869.364

s r a e Y 5 2 0 . 5 =

∑ad ∑d

Weighted Time Purchase Price

∑ad

1 5 7 . 9 6 3 4 =

∑d = 869.364 Duration =

Weighted Time (`) [(a)×(d)] (e) 7 3 6 . 3 6

PV of cash flows (`) [(b)×(c)] (d) 7 3 6 . 3 6

PVIF@ YTM 10% (c) 1 9 0 9 . 0

) V R + 0 0 0 0 0 I 7 7 7 7 7 ( 0 7 0 1

1 2 3 4 5 6

(a)

Cash flows (Rs.) Interest (b)

Alternative Method for determination of Duration:

= n o i t a r u D

1 + y (1 + y )+ Period (c − y ) − Period y c [(1 + y ) − 1] + y

y t i r u t a m

Where

o t d l e i Y = y

Formula method

e t a r n o p u o C = c

1 + 0.1 (1 + 0.1) + 6(0.07 − 0.1) − 6 0.1 0.07 (1 + 0.1) − 1 + 0.1  

Duration =

) . x o r p p a ( s r a e Y 5 2 0 . 5 = 5 7 9 . 5 1 1 = rr e o he gu i l h a yv l t t h n ge i s l e s r fp o te p h i t e cs ea r s l ea hv t r ge nn t i e i be nm oa ss a ee r h , t s n e s o a t en r e c em dts . dss nel e v on s bi i se f’ o ec i nnr oop i fe t o a s r a unh o dt i c er r ho u Tpp

1.1 .92 − 0.1 0.1540

Q.11 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: Face value Coupon Years to maturity Current price Current yield

Bond X ` 1,000 7% payable annually 1 ` 972.73 10%

Bond Y ` 1,000 8% payable annually 4 ` 936.52 10%

N O I T A U L A V Y T I R U C E S

s w o fl h s. a r ca ee hy t 1 le l a b el l r i ow f e n r o e i ht t a ,r r u a ed ye h et n, oe c sn i Xe H d. ny l on Bo fr o a ye t y i r t us t 1 a f mo d on t re a e eh yt et ha t e eb cl l ni i w S 8 2 7 . 2 7

8 2 7 . 2 7

1 9 0 9 . 0

4 2 2 . 2 3 1

2 1 1 . 6 6

4 6 2 8 . 0

2 1 3 . 0 8 1

4 0 1 . 0 6

3 1 5 7 . 0

6 5 . 0 5 9 , 2

4 6 . 7 3 7

0 3 8 6 . 0

4 2 8 . 5 3 3 , 3 =

s r a e Y 7 1 6 5 . 3 =

Rs. 3,335.824 Rs. 936.584

∑ad ∑d Weighted Time Purchase Price

Duration =

0 8 0 0 0 0 8 8 8 , 1

1 2 3 4 (a)

∑ad ∑d = 936.584

Weighted Time (`) [(a)×(d)] (e) PV of cash flows (`) [(b)×(c)] (d) PVIF@YTM 10% (c)

Cash flows (Rs.) Interest (b) Year

4.15 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. [Nov. 2015] [6 Marks] Ans.:

Step 1 : Determination of duration of the bonds available for investment. Duration of the bond X:

Duration of the bond Y:

0 4 6 , 2 8 . s R = 4 6 2 8 . 0 × 0 0 0 , 0 0 , 1 . s R = F I V P × n o i t a g i l b o f o t n u o m A =

Step 2 : Determination of investment to be made today to meet obligation after 2 years:

s 2nd son i i to sa b e r i uf t i d o l i e n b hi at o i l t ha ft r o iu nwd oyf i tto i a l ie r g uba a di r l e ee v hh a t t dfd e not a h n tog i n i t e ea r w r e u f e f dh i d t e sh, e t i r sho dc f e nt r oae . bmh s r eoTa ht .e s t sd y i he n2 t o voo i bt bt l fcna e i o j tu nbn q ooe e i rme t u a t b r s O u. e d l ds vu erno a i he fh Ty o s Step 3 : Determination of proportion of investment in Bond X & Bond Y (10%, 2)

ld l a e t hu sp Ym do nc oe Bb nl l i a th n s es md tn s o e vb no i w et r oe f s e e r h e t hn t i dt nn ae Xm t s de nv on Bi f no i tn n o et i mr o tp s e o vr np i e eh hT : t s .w e) 1 bx o l -l x 11 o (f te e s Lba

. ] Y Y d d n n o o B B n f i o % n 9 o 3 i t e a c r n u a l D a b × d ) n x1 a X 1 ( d [ n + o ] B X n i d e n d o a B m f o e b n o d i l t u a o r h u s D t n × ) e . 7 x x 11 m p t [ 6 p s = 5 a e . ( n 3 v o ) % n i t 11 i a x % 6 r 1 u 6 d 1 = e , ( 6 r d + 9 e ) o 0 f r 1 . 6 e i ( u r q x 10 e e = = h R 2 x 1T

N O I T A U L A V Y T I R U C E S

4.16

Step 4 : Investments in Bond X and Bond Y % 9 3 × % 0 9 4 6 3 , 2 8 . s R 0 3 2 , 2 3 . s R =

0 1 4 , 0 5 . s R =

2 5 . 6 3 9 . s R

3 7 . 2 7 9 . s R

Price of Bond No. of Bonds

Bond Y

% 1 6 × % 0 1 4 6 6 , 2 8 . s R

Bond X

Proportion (as per Step 3) Amount Invested

s d n o B 5 1 4 . 4 3 =

Rs. 32,230 936.52

s d n o B 6 2 8 . 1 5 =

Rs. 50,410 972.73

) . x p p a ( s d n o B 4 3 =

) . x p p a ( s d n o B 2 5 =

t rs oe f v dn ei t e s r e d vl nu i o nh i s a me eh r e r do nf ae r re e h nt nr , aa me ey ve on bo as i nX i s dd nn oo bB ef ho t n ho i t t . o a r br a ue nd y i tes t s hr e v t fi nef i c ti no s d uS n m.e s r e Aa h et .y r t M2a Q.12 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 Rs.100 each and will be redeemed at par. Interest is payable annually. Bond A B C

Maturity (years) 10 8 5

Coupon rate 10% 11% 9%

(i) Calculate the duration of each bond. (ii) The bond portfolio manager has been asked to keep 45% of the portfolio money in Bond A. Calculate the percentage amount to be invested in bonds B and C that need to be purchased to immunize the portfolio. (iii) After the portfolio has been formulated, an interest rate change occurs, increasing the yield to 11%. The new duration of these bonds are: Bond A=7.15 years, Bond B=6.03 years and Bond C= 4.27 years. Is the portfolio still immunized? Why or why not? (iv) Determine the new percentage of B and C that are needed to immunize the portfolio. Bond A remaining at 45% of the portfolio. Present values be used as follows: Present values PVIF0.09,t

T1 0.917

T2 0.842

T3 0.772

T4 0.708

T5 0.650

Present values PVIF0.09,t

T6 0.596

T7 0.547

T8 0.502

T9 0.460

T10 0.4224

[Nov. 2018] [12 Marks]

N O I T A U L A V Y T I R U C E S

4.17

Ans.: (i) Determination of duration of the bonds available for investment. (a) Bond A: Year

4 8 . 6 1

2 4 . 8

2 4 8 . 0

6 1 . 3 2

2 7 . 7

2 7 7 . 0

2 3 . 8 2

8 0 . 7

8 0 7 . 0

5 . 2 3

0 5 . 6

0 5 6 . 0

6 7 . 5 3

6 9 . 5

6 9 5 . 0

9 2 . 8 3

7 4 . 5

7 4 5 . 0

6 1 . 0 4

2 0 . 5

2 0 5 . 0

4 . 1 4

0 6 . 4

0 6 4 . 0

4 6 . 4 6 4

4 6 4 . 6 4

4 2 2 4 . 0

Rs.7360.24 Rs.106.404

s r a e Y 3 6 8 . 6 =

Purchase Price

∑ ad ∑d

∑ad

4 2 . 0 3 7 =

∑d = 106.404

Duration = Weighted Time =

Weighted Time (Rs.) [(a) × (d)] (e) 7 1 . 9

PV of cash flows (Rs.) [(b) × (c)] (d) 7 1 . 9

PVIF@ YTM 9% (c) 7 1 9 . 0

0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 1

0 1 2 3 4 5 6 7 8 9 1

(a)

Cash flows (Rs.) Interest (b)

(b) Bond B: Year

2 5 1 . 1 3

8 8 7 . 7

8 0 7 . 0

5 7 . 5 3

5 1 . 7

0 5 6 . 0

6 3 3 . 9 3

6 5 5 . 6

6 9 5 . 0

9 1 1 . 2 4

7 1 0 . 6

7 4 5 . 0

6 7 7 . 5 4 4

111.074

s r a e Y 9 5 3 8 . 5 =

Rs. 648.22 Rs. 111.074

∑ad

2 2 . 8 4 6 =

2 2 7 = . 5 5

2 0 5 . 0

∑ ad ∑d

6 7 4 . 5 2

2 9 4 . 8

2 7 7 . 0

Weighted Time Purchase Price

4 2 5 . 8 1

2 6 2 . 9

2 4 8 . 0

∑d

Duration =

Weighted Time (Rs.) [(a) × (d)] (e) 7 8 0 . 0 1

PV of cash flows (Rs.) [(b) × (c)] (d) 7 8 0 . 0 1

PVIF@ YTM 9% (c) 7 1 9 . 0

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

1 2 3 4 5 6 7 8

(a)

Cash flows(Rs.) Interest (b)

CRACKER

Strategic Financial Management AUTHOR PUBLISHER DATE OF PUBLICATION EDITION ISBN NO PAGE NO. BINDING TYPE

: : : : : : :

K.M. BANSAL, ANJALI AGARWAL TAXMANN FEBRUARY 2022 5TH EDITION 9789393880758 632 PAPERBACK

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Description This book is prepared exclusively for the Final Level of Chartered Accountancy Examination requirement. It covers the entire revised, new syllabus as per ICAI. The Present Publication is the 5th Edition for CA-Final | New Syllabus, authored by CA (Dr.) K.M. Bansal & CA Anjali Agarwal, with the following noteworthy features: u

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