Sfm bond valuation - perpetual bond

CA Final 2266 views 2 replies

Hello Respected Members,

I am finding it difficult to solve a question relating to Perpetual Bond.

I tried looking for the solution but could not find any. I am getting value of the bond but have problem finding YTM.

I would be glad if anyone could provide me a solution for the question.

Q.) A Rs. 100 perpetual bond is currently selling for Rs. 95. The coupon rate of interest is 14.5 % and the discount rate is 16 %. Calculate the value of the Bond. Should it be bought? What is its Yield to Maturity?

Thanks.

Replies (2)

YTM = 15.2631%

Logic: YTM is the rate at which the PV of cashflows equals Present value of bond.

In case of perpetual bond P = I/r i.e. 95=14.5/r.....'r' is your YTM

Thanks Sheena!!


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