A hypothetical company ABC Ltd. issued a 10% Debenture (Face Value of 1000) of the duration of 10 years is currently trading at 850 per debenture.…

CA Final · Advanced Financial Management · RTP · January 2026
A hypothetical company ABC Ltd. issued a 10% Debenture (Face Value of 1000) of the duration of 10 years is currently trading at 850 per debenture. The bond is convertible into 50 equity shares being currently quoted at 17 per share. If yield on equivalent comparable bond is 11.80%, then determine the spread of yield of the above bond from this comparable bond. The relevant present value table is as follows. Present Values t1 t2 t3 t4 t5 t6 t7 t8 t9 t10 PVIF 0.11, t 0.901 0.812 0.731 0.659 0.593 0.535 0.482 0.434 0.391 0.352 PVIF 0.13, t 0.885 0.783 0.693 0.613 0.543 0.480 0.425 0.376 0.333 0.295

Suggested Answer and Working Notes:

Conversion Price = 50 x 17 = 850 Intrinsic Value = 850 Accordingly the yield (r) on the bond shall be: 850 = 100 PVAF (r, 10) +1000 PVF (r, 10) Let us discount the cash flows by 11% 850 = 100 PVAF (11%, 10) + 1000 PVF (11%, 10) 850 = 100 x 5.890 + 1000 x 0.352 = 91 Now let us discount the cash flows by 13% 850 = 100 PVAF (13%, 10) + 1000 PVF (13%, 10) 850 = 100 x 5.426 + 1000 x 0.295 = -12.40 Accordingly, IRR = 11% + (90.90 / (90.90 - (-12.40))) × (13%-11%) = 11% + (90.90 / 103.30) × (13%-11%) = 12.76% The spread from comparable bond = 12.76% - 11.80% = 0.96% or 96 bps.

Topics: Security Valuation

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