FIN308 Midterm Assignment: Bond Valuation, Yield Curve and EMH
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Homework Assignment
AI Summary
This assignment provides a comprehensive analysis of bonds, covering key concepts such as bond issuer obligations, yield curves, and valuation methods. The solution addresses a mini-case involving a construction company considering issuing a 5-year bond, offering insights into the risks and opportunities presented by the current economic cycle and the shape of the yield curve. The assignment delves into the factors affecting bond price sensitivity, calculates the value of a bond, and explores the efficient market hypothesis (EMH) in its various forms, including weak, semi-strong, and strong EMH. Additionally, it includes practical exercises on bond valuation, yield to maturity (YTM), and the impact of interest rate changes on bond prices, providing a complete understanding of bond market dynamics and financial analysis.

Running head: ACCOUNTING AND FINANCE
Accounting & Finance
Name of the Student:
Name of the University:
Author’s Note:
Accounting & Finance
Name of the Student:
Name of the University:
Author’s Note:
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1ACCOUNTING AND FINANCE
Table of Contents
A Mini Case Bonds..........................................................................................................................2
B: Exercise.......................................................................................................................................5
C. Efficient Market Hypothesis.......................................................................................................7
Table of Contents
A Mini Case Bonds..........................................................................................................................2
B: Exercise.......................................................................................................................................5
C. Efficient Market Hypothesis.......................................................................................................7

2ACCOUNTING AND FINANCE
A Mini Case Bonds
Q1) The key obligations of a bond issuer would be as follows:
The issuer has to repay interest on a periodic basis and also has to pay timely the capital
amount upon the maturity date.
Maintain sufficient liquidity in order to pay out the interest amounts and maintain a sound
financial position.
Q2) i)If a yield curve is upward sloping then it well states that long term interest rates are greater
than the short-term bonds. The risk will be for the bond issuer would be in the form of higher
interest cost for the long-term bond as investors are expecting a higher return for investing into
long-term bond. On the other hand, from an opportunity view point the company can well issue
short term bonds for raising funds as short-term interest rates are generally low as compared to
long-term bonds.
ii) The demand for long-term bond is higher and shorter for short-term bonds.
Q3) i) The theoretical fair value of the bond is well determined by well discounting the coupon
payments and maturity value with the help of a discount factor. The key factor which are taken
into account is the time, interest rate, maturity and coupon rate.
ii) The key factor which is sensitive to valuation of bond is the interest rate.
Q4) The value of the 5-Year Bond would be the present value of coupon rate of bond that is 8%
of 1000 ($80), that would be flowing to investor for a sum of five years, plus the maturity value
A Mini Case Bonds
Q1) The key obligations of a bond issuer would be as follows:
The issuer has to repay interest on a periodic basis and also has to pay timely the capital
amount upon the maturity date.
Maintain sufficient liquidity in order to pay out the interest amounts and maintain a sound
financial position.
Q2) i)If a yield curve is upward sloping then it well states that long term interest rates are greater
than the short-term bonds. The risk will be for the bond issuer would be in the form of higher
interest cost for the long-term bond as investors are expecting a higher return for investing into
long-term bond. On the other hand, from an opportunity view point the company can well issue
short term bonds for raising funds as short-term interest rates are generally low as compared to
long-term bonds.
ii) The demand for long-term bond is higher and shorter for short-term bonds.
Q3) i) The theoretical fair value of the bond is well determined by well discounting the coupon
payments and maturity value with the help of a discount factor. The key factor which are taken
into account is the time, interest rate, maturity and coupon rate.
ii) The key factor which is sensitive to valuation of bond is the interest rate.
Q4) The value of the 5-Year Bond would be the present value of coupon rate of bond that is 8%
of 1000 ($80), that would be flowing to investor for a sum of five years, plus the maturity value
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3ACCOUNTING AND FINANCE
of $1000 that would be coming after a sum of five years. Discounting of these cash flows would
be done by using a interest rate of 8%.
Q5) i) If the required return or interest rate rises then the prices of the bond would be falling
down.
Particulars Amt.
Face Value 1000
Coupon Rate 8%
Interest Rate 8%
Time 5
Present Value -1000.00
Particulars Amt.
Face Value 1000
Coupon Rate 8%
Interest Rate 10%
Time 5
Present Value -924.18
ii) We would now be having a discount bond.
iii) Graphical Movement of the price of bond along with the movement in the time frame:
0 2 4 6
£840.00
£860.00
£880.00
£900.00
£920.00
£940.00
£960.00
£980.00
£1,000.00
£1,020.00
Movement of Price till Maturity
of $1000 that would be coming after a sum of five years. Discounting of these cash flows would
be done by using a interest rate of 8%.
Q5) i) If the required return or interest rate rises then the prices of the bond would be falling
down.
Particulars Amt.
Face Value 1000
Coupon Rate 8%
Interest Rate 8%
Time 5
Present Value -1000.00
Particulars Amt.
Face Value 1000
Coupon Rate 8%
Interest Rate 10%
Time 5
Present Value -924.18
ii) We would now be having a discount bond.
iii) Graphical Movement of the price of bond along with the movement in the time frame:
0 2 4 6
£840.00
£860.00
£880.00
£900.00
£920.00
£940.00
£960.00
£980.00
£1,000.00
£1,020.00
Movement of Price till Maturity
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4ACCOUNTING AND FINANCE
Q6) i) If the bond is selling for AED900 then the YTM would be 10.68% as shown below:
Particulars Amt.
Face Value 1000
Coupon Rate 8%
Present Value 900.00
Time 5
YTM 10.68%
ii) Rising interest rate would be a concern as this would be making the bond price fall to around
AED900.
Q7) Annual Yield
Annual Yield Coupon/Current Price
Coupon 80.00
Price 924.18
Yield 8.66%
Capital Gain Yield
Capital Gain Yield (P1-P0)/P0
P1 1000
Po 924.18
Capital Gain Yield 8.20%
Duration of Bond
Cash Flow Time Cash Flows PV of CF (PV/Total)
1 80 72.73 0.0786934
Q6) i) If the bond is selling for AED900 then the YTM would be 10.68% as shown below:
Particulars Amt.
Face Value 1000
Coupon Rate 8%
Present Value 900.00
Time 5
YTM 10.68%
ii) Rising interest rate would be a concern as this would be making the bond price fall to around
AED900.
Q7) Annual Yield
Annual Yield Coupon/Current Price
Coupon 80.00
Price 924.18
Yield 8.66%
Capital Gain Yield
Capital Gain Yield (P1-P0)/P0
P1 1000
Po 924.18
Capital Gain Yield 8.20%
Duration of Bond
Cash Flow Time Cash Flows PV of CF (PV/Total)
1 80 72.73 0.0786934

5ACCOUNTING AND FINANCE
8
2 80 66.12
0.1430790
5
3 80 60.11
0.1951077
9
4 80 54.64
0.2364942
9
5 1080 670.60
3.6280374
7
924.2 4.281
Duration 4.281
Q8) As the bond moves towards maturity Capital gain yield will be low as bond price approaches
towards maturity and current yield would also fall as the bond price increases as it would be
approaching maturity.
B: Exercise
1) Value of Bond is $1161.84
1 2 3 4 5
Particulars 2024 2025 2026 2027 2028 2029
Cash Flows 115 115 115 115 115
Terminal Cash Flow 1000
Discounting Factor @ 7.5% 0.00 0.93 0.87 0.80 0.75 0.70
Discounted Cash Flows 0.00 106.98 99.51 92.57 86.11 776.66
Price 1161.84
2) Price of Bond will be 109.16
Particulars Amt.
Face Value 100
Coupon 5%
Time 5
YTM 3.00%
Price -€ 109.16
8
2 80 66.12
0.1430790
5
3 80 60.11
0.1951077
9
4 80 54.64
0.2364942
9
5 1080 670.60
3.6280374
7
924.2 4.281
Duration 4.281
Q8) As the bond moves towards maturity Capital gain yield will be low as bond price approaches
towards maturity and current yield would also fall as the bond price increases as it would be
approaching maturity.
B: Exercise
1) Value of Bond is $1161.84
1 2 3 4 5
Particulars 2024 2025 2026 2027 2028 2029
Cash Flows 115 115 115 115 115
Terminal Cash Flow 1000
Discounting Factor @ 7.5% 0.00 0.93 0.87 0.80 0.75 0.70
Discounted Cash Flows 0.00 106.98 99.51 92.57 86.11 776.66
Price 1161.84
2) Price of Bond will be 109.16
Particulars Amt.
Face Value 100
Coupon 5%
Time 5
YTM 3.00%
Price -€ 109.16
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6ACCOUNTING AND FINANCE
3) The cash flows from a future value perspective would be around 749,944 if same is quarterly
paid and if its paid on an annual basis the same would be around 2,284,985. However from an
investment perspective the monthly cash flow should be chosen and should be well paid at the
beginning of each month for higher future value.
Particulars Amt. Particulars Amt.
Investment Amount 1500 Investment Amount 1500
Annual Interest Rate 7.30% Annual Interest Rate 7.30%
Quarterly Int Rate 1.83% Quarterly Int Rate 1.83%
Time (In Years) 32 Time (In Years) 32
Time (In Quarters) 128 Time (In Quarters) 128
Future Value (End of
Year)
749,9
44
Future Value (Beg of
Year)
763,6
30
Particulars Amt. Particulars Amt.
Investment Amount 1500 Investment Amount 1500
Annual Interest Rate 7.30% Annual Interest Rate 7.30%
Quarterly Int Rate 0.61% Quarterly Int Rate 0.61%
Time (In Years) 32 Time (In Years) 32
Time (In Quarters) 384 Time (In Quarters) 384
Future Value (End of
Year)
2,284,9
85
Future Value (Beg of
Year)
2,298,8
85
4) YTM: 58.49%
Particulars Amt.
Face Value 1000
Maturity (Year) 5
Present Value -100
Yield 58.49%
3) The cash flows from a future value perspective would be around 749,944 if same is quarterly
paid and if its paid on an annual basis the same would be around 2,284,985. However from an
investment perspective the monthly cash flow should be chosen and should be well paid at the
beginning of each month for higher future value.
Particulars Amt. Particulars Amt.
Investment Amount 1500 Investment Amount 1500
Annual Interest Rate 7.30% Annual Interest Rate 7.30%
Quarterly Int Rate 1.83% Quarterly Int Rate 1.83%
Time (In Years) 32 Time (In Years) 32
Time (In Quarters) 128 Time (In Quarters) 128
Future Value (End of
Year)
749,9
44
Future Value (Beg of
Year)
763,6
30
Particulars Amt. Particulars Amt.
Investment Amount 1500 Investment Amount 1500
Annual Interest Rate 7.30% Annual Interest Rate 7.30%
Quarterly Int Rate 0.61% Quarterly Int Rate 0.61%
Time (In Years) 32 Time (In Years) 32
Time (In Quarters) 384 Time (In Quarters) 384
Future Value (End of
Year)
2,284,9
85
Future Value (Beg of
Year)
2,298,8
85
4) YTM: 58.49%
Particulars Amt.
Face Value 1000
Maturity (Year) 5
Present Value -100
Yield 58.49%
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7ACCOUNTING AND FINANCE

8ACCOUNTING AND FINANCE
5) Stock Price
CAPM
Cost of Equity
Risk Free Rate 5.45%
Market Return 12%
Beta 1.25
Cost of Equity 13.64%
Year Dividend
2017 2
2018 3
2019 2.1
Growth Rate: (2.1-2.0)/2.0 5.00%
DDM (Intrinsic Share Price) D1/(Re-g)
D1 3.05
Re 13.64%
Growth (g) 5.00%
DDM (Intrinsic Share Price) 35.31
C. Efficient Market Hypothesis
Q1) i) There are three forms of EMH: weak, semi-strong, and strong1
ii) Strong EMH: This form of market shows that all possible information has been
incorporated and neither fundamental nor technical analysis can help in gaining an investor
excess return.
Semi-Strong EMH: This form of market assumes that only public information has been
incorporated almost immediately, share price can be sometime inaccurate and fundamental
analysis can help in gaining an investor excess return but technical cannot.
5) Stock Price
CAPM
Cost of Equity
Risk Free Rate 5.45%
Market Return 12%
Beta 1.25
Cost of Equity 13.64%
Year Dividend
2017 2
2018 3
2019 2.1
Growth Rate: (2.1-2.0)/2.0 5.00%
DDM (Intrinsic Share Price) D1/(Re-g)
D1 3.05
Re 13.64%
Growth (g) 5.00%
DDM (Intrinsic Share Price) 35.31
C. Efficient Market Hypothesis
Q1) i) There are three forms of EMH: weak, semi-strong, and strong1
ii) Strong EMH: This form of market shows that all possible information has been
incorporated and neither fundamental nor technical analysis can help in gaining an investor
excess return.
Semi-Strong EMH: This form of market assumes that only public information has been
incorporated almost immediately, share price can be sometime inaccurate and fundamental
analysis can help in gaining an investor excess return but technical cannot.
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9ACCOUNTING AND FINANCE
Weak-Strong EMH: This form of market assumes that only public market information has
been incorporated almost immediately, share price is inaccurate and fundamental analysis can
help in gaining an investor excess return and technical also sometimes.
Q2) The hypothesis of EMH says that all possible public and private information’s which are
related to the stock or company is well incorporated in the stock price. However, it is the
investors who asses the growth rate, the required return factors and accordingly then determine
the share price by estimating the cash flows they expect to receive. Now these factors like
growth rate, outlook for company and required return can well differ from investor to investor
and the investor who is able to well forecast correctly, timely and in a better and precise manner
is able to well generate Alpha or excess positive return.
Q3) The key reason why there is a high efficiency in the stock market is due to the timely
disclosures and availability of information that are made easily available whether it is in the form
of company activities, performance position and other events and strategies. However, in the
case of real estate market the same is not applicable due to scarcity of information and data
points that are well able to an investor for analysis purpose.
Weak-Strong EMH: This form of market assumes that only public market information has
been incorporated almost immediately, share price is inaccurate and fundamental analysis can
help in gaining an investor excess return and technical also sometimes.
Q2) The hypothesis of EMH says that all possible public and private information’s which are
related to the stock or company is well incorporated in the stock price. However, it is the
investors who asses the growth rate, the required return factors and accordingly then determine
the share price by estimating the cash flows they expect to receive. Now these factors like
growth rate, outlook for company and required return can well differ from investor to investor
and the investor who is able to well forecast correctly, timely and in a better and precise manner
is able to well generate Alpha or excess positive return.
Q3) The key reason why there is a high efficiency in the stock market is due to the timely
disclosures and availability of information that are made easily available whether it is in the form
of company activities, performance position and other events and strategies. However, in the
case of real estate market the same is not applicable due to scarcity of information and data
points that are well able to an investor for analysis purpose.
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