Blue Line Shoe Company is contemplating a debenture issue on the following terms : Face Value ₹1,000 Term to Maturity 7 years Coupon Rate of Interest : Years 1-2 10% p.a. 3-4 12% p.a. 5-7 15% p.a. The current market rate
CS Executive · Capital Markets & Securities Laws · PYQS · June 2018
Blue Line Shoe Company is contemplating a debenture issue on the following terms : Face Value ₹1,000 Term to Maturity 7 years Coupon Rate of Interest : Years 1-2 10% p.a. 3-4 12% p.a. 5-7 15% p.a. The current market rate of interest on similar debentures is 15% p.a. The company proposes to price the issue so as to yield a (compounded) return of 16% p.a. to the investors. The debentures would be redeemed at a premium of 12% at the end of seven years. Compute the maturity price of the debentures.
Answer & Explanation:
Computation of maturity price of debentures Year Coupon (₹) PV of Coupon @16% (₹) 1 100 86.21 2 100 74.32 3 120 76.88 4 120 66.27 5 150 71.42 6 150 61.57 7 150 53.07 PV of Coupons 489.74 Redemption Value = ₹1,000 (1.12) = ₹1,120 PV of redemption value = ₹1,120 / (1.16) 7 = ₹396.29 Price of the debentures = ₹489.74 + ₹396.29 = ₹886.03
Topics: Debenture Valuation