Stature Technologies plans to issue
£100 million of bonds with a face value of £100,000, coupon...

Question

Stature Technologies plans to issue
£100 million of bonds with a face value of £100,000, coupon rate of 4.125 per
cent and 10 years to maturity. The current yield to maturity of these bonds is
4 per cent. In one year, the yield to maturity on the bonds will be either 6
per cent or 3.75 per cent with equal probability. Assume investors are
risk-neutral.

1 If the bonds are non-callable,
what is the price of the bonds today? (30 marks) 2 If the bonds are callable
one year from today at 115 per cent of face value, will their price be greater
than or less than the price you computed in (1)? Why? (30 marks) 3 If Stature
Technologies wished to issue the bond (without call option) in Abu Dhabi as a
sukuk, explain, using a diagram, how you would construct the Islamic bond. (40
marks)

Prateek · Accepted Answer

Answer 1:
The bond price today is computed by using the Excel PV function with the following inputs:
RATE = 4% [It is the current YTM of the bond]
NPER = 10 [It is the years to maturity]
PMT = -4125000 [It is the annual coupon payment which is determined by multiplying the total face value of bonds with the coupon rate]
FV = -100000000 [It is the face value of the bond]
Thus, the price of the bond today is 10,10,13,861.97.
Check the Excel file for calculations and formula.
Answer 2:
In first case when YTM is 6%:
The bond price today is computed by using the Excel PV function with the following inputs:
RATE = 6% [It is the current YTM of the bond]
NPER = 9 [It is the years to maturity]
PMT = -4125000 [It is the annual coupon payment which is determined by multiplying the total face value of bonds with the coupon rate]
FV = -115000000 [It is the face value of the bond which will be received at the time of calling the bond at 115% of the face value.]
Thus, the price of the bond is 9,61,25,303.94.
In second case when YTM is 3.75%:
The bond price today is computed by using the Excel PV function with the following inputs:
RATE = 6% [It is the current YTM of the bond]
NPER = 10 [It is the years to maturity]
PMT = -4125000 [It is the annual coupon payment which is determined by multiplying the total face value of bonds with the coupon rate]
FV = -115000000 [It is the face value of the bond which will be received at the time of calling the bond at 115% of the face value.]
Thus, the price of the bond is 11,35,89,856.23.
The average bond price is then 10,48,57,580.08.
Here the bond price is higher than the current bond price because the time to maturity is lower than that in Question 1. However, if only 3.75% YTM would have been taken then the price will be higher due to lower discounting of future cash flow received in the form of coupon payments.

Stature Technologies plans to issue £100 million of bonds with a face value of £100,000, coupon rate of 4.125 per cent and 10 years to maturity. The current yield to maturity of these bonds is 4 per...

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