(a) A Ltd. has issued convertible bonds, which carries a coupon rate of 14%. Each bond...

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(a) A Ltd. has issued convertible bonds, which carries a coupon rate of 14%. Each bond is convertible into 20 equity shares of the company A Ltd. The prevailing interest rate for similar credit rating bond is 8%. The convertible bond has 5 years maturity. It is redeemable at par at Rs. 100. The relevant present value table is as follows. Present values t t t3 t ts PVF 0.14, t 0.877 0.769 0.675 0.592 0.519 PVIF0.08, 0.926 0.857 0.794 0.735 0.681 You are required to estimate: (Calculations be made upto 3 decimal places) (i) current market price of the bond, assuming it being equal to its fundamental value, (ii) minimum market price of equity share at which bond holder should exercise conversion option; and (iii) duration of the bond. (8 Marks) (b) Your forex dealer had entered into a cross currency deal and had sold US $ 10,00,000 against EURO at US $1 EURO 1.4400 for spot delivery. However, later during the day, the market became volatile and the dealer in compliance with his management's guidelines had to square - up the position when the quotations were: Spot US $1 1 month margin 2 months margin Spot US $ 1 1 month forward 2 months forward What will be the gain or loss in the transaction? INR 31.4300/4500 25/20 45/35 EURO 1.4400/4450 1.4425/4490 1.4460/4530 (c) Briefly explain Counter Party Risk and the various techniques to manage this risk. OR Explain some of the parameters to identify the currency risk. (8 Marks) (4 Marks) (a) A Ltd. has issued convertible bonds, which carries a coupon rate of 14%. Each bond is convertible into 20 equity shares of the company A Ltd. The prevailing interest rate for similar credit rating bond is 8%. The convertible bond has 5 years maturity. It is redeemable at par at Rs. 100. The relevant present value table is as follows. Present values t t t3 t ts PVF 0.14, t 0.877 0.769 0.675 0.592 0.519 PVIF0.08, 0.926 0.857 0.794 0.735 0.681 You are required to estimate: (Calculations be made upto 3 decimal places) (i) current market price of the bond, assuming it being equal to its fundamental value, (ii) minimum market price of equity share at which bond holder should exercise conversion option; and (iii) duration of the bond. (8 Marks) (b) Your forex dealer had entered into a cross currency deal and had sold US $ 10,00,000 against EURO at US $1 EURO 1.4400 for spot delivery. However, later during the day, the market became volatile and the dealer in compliance with his management's guidelines had to square - up the position when the quotations were: Spot US $1 1 month margin 2 months margin Spot US $ 1 1 month forward 2 months forward What will be the gain or loss in the transaction? INR 31.4300/4500 25/20 45/35 EURO 1.4400/4450 1.4425/4490 1.4460/4530 (c) Briefly explain Counter Party Risk and the various techniques to manage this risk. OR Explain some of the parameters to identify the currency risk. (8 Marks) (4 Marks)

Answer rating: 100% (QA)

a i Current Market Price of the Bond To calculate the current market price of the bond we need to find out the sum of the present values of the future cash flows associated with the bond There are thr... View the full answer