Page 126 - Accountancy_F5

Workings:
1. Coupon based payment on semi-annual basis I = TZS 900,000
2. The number of periods for which the semi-annual payment will be done (n) = 20
3. The required rate of return – semi-annually (i) = 6%
4. The maturity value of the bond (M) = TZS 20,000,000

Thus, the bond price will be sold at TZS 16,559,023, which is lower than the par value
of the bond. In this case, the bond is said to be sold at a discount, i.e. the coupon rate is
lower than the required rate of return.
LANGUAGE EDITING
Example 4.7
LANGUAGE EDITING
Calculate the price of a 10-year government bond with 12 per cent (6% per six
months) coupon rate and par value/maturity value of TZS 20,000,000 and required
return of 10 per cent. ^READING ONLY

Solution 4.7

1
1 - c n m
> ^ 1 + ih H M
Bond price = c + ; n E
i ^ 1 + ih

FOR ONLINE
1
1 - c 20 m
,
> 1 + . 0 05h H 20 ,000 000
,
Bond price = , 1 200 000 + < F
. 005 ^ 1 + . 0 05h 20
= 1,200,000 (12.46221034) + 7,537,789.70
= TZS 22,492,442

The bond will be sold at TZS 22,492,442 which is higher than the par value of the bond,
i.e. the bond is sold at premium. The coupon rate is higher than the required rate of return.

Exercise 4.2
On 31 January, Mr. Mafanikio has decided to purchase five years 12 per cent Treasury
st
bonds of TZS 10,000,000 with interest payable on 30 June and 31 December
st
th
Required:
(a) Determine the amount of income that Mr. Mafanikio will be receiving at every
interest payment date.
(b) If Mr. Mafanikio expects to have financial needs that will necessitate him to sell
the bond through the secondary market, just after receiving the fourth interest
instalment, determine the price at which he will sell the bond. Use the coupon
rate as the required rate of return in the market.

Student’s Book Form Five
113

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