INV3702
Assignment 2
Semester 2
2024
, Question 1: Valuation of Bond C
Determine whether Bond C is overvalued, undervalued, or fairly valued.
To determine whether Bond C is overvalued, undervalued, or fairly valued, we
compare the bond's price to its present value based on the given yield to maturity
(YTM). Since Bond C has a 2-year maturity, a 6% annual coupon, and a YTM of
2.496%, we calculate its present value.
The bond's price is calculated as follows:
Since the calculated price of Bond C is R106.76, it should be compared to its market
price (which we do not have directly in the question). However, since we're asked to
determine whether it's overvalued or undervalued, if the bond's actual market price is
higher than R106.76, it's overvalued; if lower, it's undervalued. If it matches, it is
fairly valued.