Mr. ABC is vice president of XYZ Inc. The company is considering issuing bonds to satisfy part of its financing need for a new venture of Steel Plant, which is going to be launched in Mid-Western Region of Nepal. He knows that Nepalese Financial Market is sensitive to the price and terms and condition of bond issue. As a result of this fact he is reluctant to entertain with new issue. As a financial consultant, he is seeking your help on certain issues associated with bond contract features, price and yields. You are required to address the following issues on behalf of him.

1. What are the key features of a bond?
2. How is the value of a bond determined? What is the value of a 10-year, Rs 1,000 par value bond with a 10 percent annual coupon if its required rate of return is 10 percent?
3. What would be the value of the bond described in part 'b' if, just after it had been issued, the expected inflation rate rose by 3 percentage points, causing investors to require a 13 percent return? Would we now have a discount or a premium bond?
4. What would happen to the bonds value if inflation fell and kd declined to 7 percent? Would we now have a premium or a discount bond?
5. What would happen to the value of the 10-year bond over time if the required rate of return remained (i) at 13 percent, (ii) at 7 percent?
6. What is the yield to maturity on a 10-year, 9 percent, annual coupon, Rs 1,000 par value bond that sells for Rs 887? That sells for Rs 1,134.20? What does the fact that bond sells at a discount or at a premium tells you about the relationship between kd and bonds coupon rate?
7. What are the total return, the current yield, and the capital gains yield for the discount bond? (Assume the bond is held to maturity and the company does not default on the bond.)