BOND VALUATION Lee Teng and Hu Feng are vice presidents of Oriental Asset Management and codirectors of the company’s pension fun management division. A major new client, the Shandong Network of...

BOND VALUATION Lee Teng and Hu Feng are vice presidents of Oriental Asset Management and codirectors of the company’s pension fun management division. A major new client, the Shandong Network of Cities, has requested that Oriental Asset Management present an investment seminar to the mayors of the represented cities. Lee and Hu, who will make the presentation, have asked you to help them by answering the following questions.

1. What are the bond’s key features?


2. What are call provisions or sinking fund provisions? Do these provisions make bonds more or less risky?


3. How is the value of any asset whose value is based on expected future cash flows determined?


4. How is a bond’s value determined? What is the value of a 10-years, $1,000 par value bond with a 10% annual coupon if its required return is 10%?


5. What is the value of a 13% coupon bond that is otherwise identical to the bond described in Question 4? Would we now have a discount or a premium bond?


6. What is the value of 7% coupon bond with these characteristics? Would we now have a discount or premium bond?


7. What would happen to the values of the 7%, 10% and 13% coupon bonds over time if the required return remained at 10%? (Hint: with a financial calculation, enter PMT, 1/YR, FV, and N; then change (override) N to see what happens to the PV as it approaches maturity.)