Question

A 20 year, 8% semi-annual coupon bond with a par value of $1,000 may be called in 10 years at a call price of $1,100. The bond sells for $1,200.

L M N I e a A 20 year, 8% semi-annual coupon bond with a par value of $1,000 may be called in 10 years at a call price of $1,100. The bond sells for $1,200. Basic Input Data: Years to maturity: Periods per year: Periods to maturity: Coupon rate: Par value: Periodic payment: Current price Call price: Years till callable: Periods till callable: $1,100 $88 $1,200 $1,100 17 18 19 20

e. How would the price of the bond be affected by a change in the going market interest rates?

Please show work ( by adding numbers or CELL with formula if needed). Thank you, will rate.

Answer 1

Calculate the YTM as follows:

H J Basic input data Years to maturity Periods per year Periods to maturity Coupon rate Par value Periodic payment Current price Call price Years till callable Periods till callable 10 20 11 2 40 12 8% 13 14 1100 15 88 1200 16 17 1100 18 10 19 20 20 21 a Periodic YTM 22 3.57% 23 Annualized Nominal YTM 7.14% 24 25 b Current yield Current yield 88 1200 26 7.33% 27 28 d Periodic YTC 4% 29 Annualized Nominal YTM 30 8.00% L

Price and market rate are inversely proportional. If market rate is increased price of the bond will decrease. If market rate is decreased price of the bond will increase.

Formulas:

F G H J Basic input data Years to maturity Periods per year Periods to maturity 20 10 2 11 110*111 12 0.08 Coupon rate Par value Periodic payment Current price Call price Years till callable Periods till callable 13 1100 14 88 15 1200 16 1100 17 18 10 118*111 19 20 21 a =RATE (12,15/11,-116, 14) Periodic YTM 22 Annualized Nominal YTM 122*111 23 24 Current yield Current yield 115 116 25 b 115/16 26 27 28 d =RATE(119,15/111,-17,114) =129*111 Periodic YTC 29 Annualized Nominal YTM 30 LL