Question no 03                                                                       Term Finance Certificate (TFC): The TFC (a kind of Bond) of Company ABC is traded on the Karachi Stock Exchange for Rs 900. The Par Value of the TFC is Rs 1,000. The Coupon Rate is fixed at 15% pa. Coupons are paid annually. The TFC will Mature after exactly 2 Years (it is a 5 Year Bond issued 3 Years ago). What is the Overall Expected Rate of Return (ie. YTM) offered by this TFC? Market Price (Rs 900) is LESS than its Par Value (Rs 1,000). This Bond is selling at a Discount. Why? Possibly Interest Rate Risk. Market Interest Rate rises above TFC’s Fixed Coupon Rate so Market Price of the TFC falls below Par. Note: when Market Interest Rates rise, the Required Rate of Return (rD) for Investors rises. But, the Coupon Rate is fixed by Bond Issuer at the time of the issue. The Expected (or Promised) Rate of Return for Investors is the Yield to Maturity (or YTM). Calculate the Overall Return (or YTM) for the TFC.

Essentials Of Investments
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Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Chapter1: Investments: Background And Issues
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Question no 03                                                                      

Term Finance Certificate (TFC): The TFC (a kind of Bond) of Company ABC is traded on the Karachi Stock Exchange for Rs 900. The Par Value of the TFC is Rs 1,000. The Coupon Rate is fixed at 15% pa. Coupons are paid annually. The TFC will Mature after exactly 2 Years (it is a 5 Year Bond issued 3 Years ago). What is the Overall Expected Rate of Return (ie. YTM) offered by this TFC? Market Price (Rs 900) is LESS than its Par Value (Rs 1,000). This Bond is selling at a Discount. Why? Possibly Interest Rate Risk. Market Interest Rate rises above TFC’s Fixed Coupon Rate so Market Price of the TFC falls below Par. Note: when Market Interest Rates rise, the Required Rate of Return (rD) for Investors rises. But, the Coupon Rate is fixed by Bond Issuer at the time of the issue.

The Expected (or Promised) Rate of Return for Investors is the Yield to Maturity (or YTM).

Calculate the Overall Return (or YTM) for the TFC.

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