Answer to Question #212640 in Finance for Tati

Question #212640

After graduation, you work as a Financial Analyst in a reputable multinational company in Kuala Lumpur. Your superior has assigned you a new task. You are required to analyse the following bonds.

Company. Petron Berhad Shell Corporation

Coupon rate per annum 10% 10%

Maturity in years 15 10

Face value per bond $1,000 $1,000

Yield to maturity per annum 11% 13%

Current selling price per bond $900 $1,100

Based on the above information, you are required to:

a) Compute the current bond prices for both companies if the interest payment is once a year.

b) Based on the above result, provide your conclusion.

c) Discuss three main differences between conventional bond and Islamic bond.

Expert's answer

Given Information

Two Company bonds 

Petron Berhad and Shell Corporation Bonds

Coupon rates are 10% and 10%

Face Value is $1000 and $1000

Yield to maturity is 11% and 13%

Current selling price per bond = $900 and $1100

Time period 15 years and 10 years

Part a

Bond of First Company(Petron Berhad)

It can be calculated as follows:

Now ,second bond(Shell Corporation)

It can be calculated as follows:

So the Current Bond Prices of Petron Berhad and shell corporation are $928.09 and $837.21 respectively

Part b

Here the decison criteria would be to choose the bond with lower price value that is choose bond second (Shell corporation bond) here because one would have to pay less to get face value after the term of maturity.It is cheaper to buy the bond with lower price because at the end one will get $1000 face value and same coupon payment .So ,one would prefer a bond which gives this return at lower price .That is Choose bond of Shell Corporation .

Part c

The main difference between the Islamic and Conventional Bonds are as follows:

1.)Ownership of Asset-In case of Conventional Bonds ,these instruments do not provide out holder the right or share of ownership of underlying assets,business or joint ventures whereas in case of Islamic bonds ,it provides out the partial ownership of underlying asset,project ,business or joint ventures on which it is based.

2)Units of Issue- In case of Conventional Bonds ,each bond represent out a share of debt whereas in case of islamic bonds ,each bond represents a share of the underlying assets.

3.)Issue price -In case of Conventional Bonds ,Face value of a bond price is determined out by the credit worthiness of the issuer whereas in case of islamic bonds, face value is calculated by the market value of underlying asset.

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