Question

11. Bond listings and yield spreads Aa Aa E The following bond list is from the business section of a financial newspaper on January 1, 2016. Assume that each bond shown matures on January 1 in 5, 10, or 30 years. Each bond shown pays a semiannual coupon-the coupon rate is in the column labelled Coupon. The Last Price and Last Yield columns indicate each bond's price and YTM at the end of trading. EST Spread indicates the bond's spread above the relevant U.S. Treasury benchmark, expressed as a percentage. UST indicates which U.S. Treasury security maturity is the relevant benchmark for each bond. EST Volume shows the number of bonds traded during the day. Notice also that prices are stated relative to a par value of $100. Assume all bonds have the same default premium. Fill in the value of Powell Co.'s bonds. Company Unitech Inc. Northern Inc. Acme Inc. Worth Inc. Powell Co. Coupon 8.25% 5.80% 8.98% 9.63% 4.13% Maturity 01-01-2026 01-01-2021 01-01-2026 01-01-2046 01-01-2021 Last Price $97.87 $99.22 $104.07 $88.14 Last Yield 8.57% 5.98% 8.37% 10.98% 6.26% EST Spread 2.37 0.58 2.17 4.03 0.86 USTEST Volume (Years) (1000s) 10 59,725 5 52,930 46,932 45,120 43,960 $87.46 $92.86 $89.17 $90.98 If you were to calculate the yield on a security U.S. Treasury security, the yield will be equal to

Answer 1

1). To find the bond's price, we need to put the following values in the financial calculator:

N = 5*2 = 10;

I/Y = 6.26%/2 = 3.13%

PMT = (4.13%/2)*100 = 2.065;

FV = 100;

Press CPT, then PV, which gives us -90.98

So, Bond's Price = $90.98

Hence, 4th Option is correct.

2). Relevant UST securities' maturity is 10 years, which is same as Unitech and Acme.

So, Yield on 10-year UST Security = Unitech's Yield - EST Spread

= 8.57% - 2.37% = 6.20%

Same can be found by using Acme's Yield and EST Spread.

Hence, 3rd Option is correct.

3). Bond trading at premium will have last price more than the par value of $100, which is Acme Inc.

Hence, 3rd option is correct.