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  • Category: School Homework Help

    Financial institutions and services


    Have a query regarding financial bonds and confused which ones are better to buy? Looking out for advice here? No worries, ISC financial experts shall provide you advice to resolve your query.

    An investor is given two choices, either: A) purchase a 10-year, R.O. 1,000 par bond that pays R.O. 60 coupons every 6 months. If the required return is 10% per year
    B) purchase a 10-year, R.O. 1,000 par bond that pays 10% of the par value as coupon every year. If the required return is 10% per year
    C) purchase a 10-year, R.O. 1,000 par bond that pays 8% of par value as coupons every year. If the required return is 10% per year
    Which bond should you choose to buy? Justify.
  • Answers

    2 Answers found.
  • Your question is confusing. You said two options. But you have mentioned 3 options.

    Option A is better. RO 1000 will give you RO 60 every six months So in a year you will get RO 120 per year. If you invest the R O 60 you will get additional interest on that

    Option B will give you RO 100 after one year and Option C will give you RO 80.

    If you compare these three the first one is the best.

    drrao
    always confident

  • In your question it is not clear whether you are buying them at the face value or market / current value. It makes a difference in the yield as these bonds are for a long period that is 10 years. I assume that you are buying them at Rs 1000 each bond. If not, you can add that element separately. For example, if you are buying them at Rs 980 then return will be calculated as a percentage of that and it will be more. Sometimes they are available for increased value like say Rs 1030 each bond and accordingly the return will be less.

    Anyway as per the data given, the returns are as follows -

    Option-A: The investor purchases the bond in Rs 1000. The return is Rs 120 per year which comes to a return of 12.12 % as the Rs 60 got 6 months ahead will also fetch a nominal interest (assuming it to be kept in the ordinary savings bank account) of approximately Rs 1.20 only making the total return as Rs 121.20

    Option-B: The investor purchases the bond in Rs 1000. The return is 10% per annum.

    Option-C: The investor purchases the bond in Rs 1000. The return is 8% per annum.

    It is clear that option-A is the best one. I repeat that please check the buying prices again and if they are to this or that side of Rs 1000 the returns will be modified accordingly.

    Knowledge is power.


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