Bond valuation Calculate Use the rate from above Insead of R and 2 subtitute it wotht eh govenment rate and calcualte the value aaccordingly Double it and recaulate bond value
- Risk-free rate in your country (= interest you earn on government bond) = 7%
Based on our analysis, we recommend an ERP of 7.0% for the UAE as of 30 September 2018. the risk-free rate. It represents the additional return investors require from equity investment to reflect the additional risk in the asset compared to a 'risk-free' asset.
- Interest you earn on a deposit in your country in your bank = 2.5%
Emirates National Bank of Dubai Flexi Deposit has 2.5% of interest annually.
- Inflation rate in your country = 2.18%
UAE’s inflation rate for 2022 is 2.18%. It was 2.02% back in 2021.
- Real risk-free rate
The formula for real risk-free rate is (1 + Normal Risk Free Rate) / (1 + Inflation Rate)-1
(1+0.07) / (1+0.0218)- 1 = 0.047
This shows that in UAE there will be a
- Real interest rate on your bank deposit
The formula for the real interest rate on your bank deposit is (1+Nominal Interest Rate)/ (1+ Inflation Rate) -1
(1+0.025) / (1+0.218)- 1= 0.00313
Calculate
Use the rate from above
Insead of R and 2 subtitute it wotht eh govenment rate and calcualte the value aaccordingly
Double it and recaulate bond value
- You buy a 3-year government bond of 1000 in your currency that pays the interest you identified above. How much is the bond value if
o assume r(coupon government rate)=2% (coupon rate = nominal rate), INT = 1000 x 0.02 = 20, n=3, M = 1000 (face value or maturity value)
- Bond value = INT/(1+r(market))+ INT/(1+r)2+ INT/(1+r)3 + M/(1+r)3 = 20/1.02 + 20/1.022 + 20/1.023 + 1000/1.023 = 1000 bond value = nominal value
o the market interest rate is the same as the risk-free rate above?
o the market interest rate doubles? How much do you loose in bond value in percentage?
§ Bond value = INT/(1+r(market))+ INT/(1+r)2+ INT/(1+r)3 + M/(1+r)3 = 20/1.04 + 20/1.042 + 20/1.043 + 1000/1.043 = (decrease)
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