Question

Your boss is back. This time he/she provides you a partial model to a bond valuation. This bond is a 20-year, 8% semiannual coupon bond with a par value of $1,000 may be called in 5 years at a call price of $1,040. The bond sells for $1,100. (Assume that the bond has been issued.) She needs you to complete the partial model for her. She needs the following to be answered. What is the bond's yield to maturity? What is the bond's current yield? What is the bond's capital gain or loss yield? What is the bond's yield to call? How would the price of the bond be affected by a change in the going market interest rate? (Hit: Conduct a sensitivity analysis of price to changes in the going market rate for the bond. Assume the bond will be called if and only if the going rate of interest falls below the coupon rate. This is an oversimplification, but assume it for the purpose of this problem.) Now assume the date is October 25, 2017. Assume further that a 12%, 10-year bond was issued on July 1, 2017, pays interest semiannually (on January 1 and July 1), and sells for $1,00. Use the attached spreadsheet to find the bond's yield. NEED HELP ON SECTION E PLEASE!!

KV ASSIGNMENT 3 - Saved Kayla Vasquezs File Home Insert Draw Page Layout Formulas Data Review View Help Tell me what you want to do Share Comments Splt D View Side by Side Hd Synchronous Scrolling Switch Macros Formula Bar Normal Page Break Page Custom Zoom 100% Zoom to New Arrange Freeze GridlinesHeadings Preview Layout Views Selection Window All Panes . UnhideǐnReset window Position windows . Workbock Views 46 The YTC is lower than the YTM because if the bond is called, the buyer will lose the difference between the call price and the 47 current price in just 4 years, and that loss will offset much of the interest imcome. Note too that the bond is likely to be called 48 and replaced, hence that the YTC will probably be earned 49 50 NOW ANSWER THE FOLLOWING NEW QUESTIONS 1 ow 52 e. How would the price of the bond be affected by changing the going market interest rate? (Hint: Conduct a 53 sensitivity analysis of price to changes in the going market interest rate for the bond. Assume that the bond will be 54 called if and only if the going rate of interest falls below the coupon rate. That is an oversimplification, but assume it 55 anyway for purposes of this problem.) 57 Nominal market rate, r 58 Value of bond if it's not called: 59 Value of bond if it's called 8% The bond would not be called unless rccoupon 61 We can use the two valuation formulas to find values under different r's, in a 2-output data table, and then use an IF 62 statement to determine which value is appropriate 64 Value of Bond If: Not called Called $0.00 Actual value considering call likehood 66 Rate, r 67 $0.00 71 72 73 74 75 76 10% 12% 16% 78 f. Now assume the date is 10/25/2014. Assume further that a 12%, 10-year bond was issued on 7/1/2014, pays interest 79 semiannually (January 1 and July 1), and sells for $1,100. Use your spreadsheet to find the bond's yield. Build a Model Solution Sheet2 Sheet3 10-44 PM O Type here to search 1/27/2019 9

Answer 1

Answer :

Par Value = $ 1000, Market Value = $ 1100, Call Price = $ 1040, Coupon Rate = 8 % per annum payable semi-annually, Tenure = 20 years or 40 half-years, Time to call = 5 years or 10 half-years

Semi-Annual Coupon = 0.08 x 1000 x 0.5 = $ 40

(a) Let the yield to maturity be 2r

Therefore, 1100 = 40 x (1/r) x [1-{1.(1+r)^(40)}] + 1000 / (1+r)^(40)

Using EXCEL’s goal seek function to solve the above problem we get:

r = 3.53 % = Periodic YTM

Nominal Annualized YTM = 2 x3.53 = 7.06 %

(b) Annual Coupon = 2 x Semi-Annual Coupon = 2 x 40 = $ 80

Current Yield = Annual Coupon X Market Price = 80 / 1100 = 0.07273 or 7.273 %

(c) Market Price = $ 1100 and Par Value = $ 1000

Capital Gains/Loss Yield at maturity = (1000 – 1100 / 1100) = – 9.09 %

Capital Gains/Loss Yield at first call = (1040 – 1100 / 1100) = – 5.45 %

(d) Let the Yield to Call be 2 R

Therefore, 1100 = 40 x (1/R) x [1-{1/(1+R)^(10)}] + 1040 / (1+R)^(10)

Using EXCEL’s goal seek function to solve the above equation, we get:

R = 3.16 % = Periodic YTC

Annualized Nominal YTC = 2 x Periodic YTC = 2 x 3.16 = 6.32 %