Suppose you are working in an investment company as a Financial Analyst. Your company wants to invest in zero-coupon bonds of Pak Steels Limited. These bonds have a face value of Rs.2000 per bond and have five years to maturity. If your company decided to have a 10% p.a return on this investment, then what price would you recommend per bond to purchase these zero-coupon bonds of Pak Steels Limited?
2006-11-07 06:11:19 · 3 answers · asked by Me 2 in Business & Finance ➔ Investing
Rs 2000 in T years is worth Rs 2000/(1+r)^T today, where r is the required return.
With r=0.1 and T=5 we find Rs 1241.84
2006-11-08 00:42:11 · answer #1 · answered by cordefr 7 · 0⤊ 0⤋
It depends.
What you really need to know is the prevailing interest rate for a bond of that quality and maturity at the time.
If the prevailing interest rate for a bond of similar maturity and quality rating is only 5% and you are paying 10%, your company would want to pay a premium for the bonds (over Rs. 2000).
If the prevailing interest rate for a similar bond is 15%, then you would want to pay less for them (less than Rs. 2000).
There are other factors that will have some effect on price such as stability of local region and local currancy, outlook of the company, call clauses or can't be called, attractiveness of other investment vehicles, etc...
2006-11-07 06:20:19 · answer #2 · answered by Slider728 6 · 0⤊ 0⤋
1241.84 will yield 10% over 5 years.
2006-11-07 06:15:22 · answer #3 · answered by Anonymous · 0⤊ 0⤋