Question

The following bond list is from the business section of a newspaper on January 1, 2016. Notice that each bond shown matures on January 1 in 5, 10, or 30 years. Each bond shown pays a semiannual coupon and the coupon rate is in the column labeled 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 US Treasury benchmark, given as a percentage. UST indicates which US Treasury security maturity is the relevant benchmark for each bond. EST Volume shows the number of bonds traded during the day. Prices are stated relative to a par value of $100.

Fill in the nominal YTM for Pickman Inc.’s bonds. (Note: Do not round your intermediate calculations.)

Company	Coupon	Maturity	Last Price	Last Yield	EST Spread	UST (Years)	EST Volume (1000s)
Schubert Inc.	8.13%	01-01-2026	$82.25	11.11%	6.20%	10	72,070
Chapman Inc.	9.63%	01-01-2046	$80.48	12.05%	7.15%	30	65,275
Rust Inc.	4.50%	01-01-2021	$95.18	5.62%	1.37%	5	59,277
Murphy & Co.	5.38%	01-01-2021	$101.02	5.14%	0.89%	5	57,465
Pickman Inc.	7.75%	01-01-2026	$93.11	%	3.89%	10	56,305

If Chapman Inc. wants to issue new 30-year bonds today, what coupon rate would the bonds have to pay to be issued at par?

12.58%

12.05%

10.15%

11.65%

Which bond is trading at a premium?

Murphy & Co.

Schubert Inc.

Chapman Inc.

Pickman Inc.

Answer 1

1]

YTM is calculated using RATE function in Excel with these inputs :

nper = 10*2 (10 years to maturity with 2 semiannual coupon payments each year)

pmt = 100 * 7.75% / 2 (semiannual coupon payment per $100 of par value = 100 * annual coupon rate / 2. This is a positive figure as it is an inflow to the bondholder)

pv = -93.11 (current bond price per $100 of par value. This is a negative figure as it is an outflow to the buyer of the bond)

fv = 100 (redemption value per $100 of par value. This is a positive figure as it is an inflow to the bondholder)

The RATE is calculated to be 4.40%. This is the semiannual YTM. To calculate the annual YTM, we multiply by 2. Annual YTM is 8.80%

The nominal YTM for Pickman Inc.’s bonds is 8.80%

2]

A bond will trade at par if its yield equals its coupon rate.

If Chapman Inc wants to issue new 30-year bonds today, their coupon rate should equal the yield of the currently issued 30-year bonds.

The bonds would have to pay a coupon rate of 12.05%

3]

A bond is trading at a premium if its price exceeds its par value

Murphy & Co is trading at a premium