Question

can you help step-by-step so I can enter into Excel.

А B с D m F H K 1 7. Bond Prices and Returns. One bond has a coupon rate of 8%, another a coupon rate of 12%. Both bonds pay interest annually, have 10-year maturities, and sell at a yield to maturity of 10%. (L06-2) a. If their yields to maturity next year are still 10%, what is the rate of return on each bond? b. Does the higher-coupon bond give a higher rate of return over this period? 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 5 Notes VB-4 VB-5 VB-6 VB-7 VB-10 VB-11 P VB-21 Calculation Mode: Automatic Workbook Statistics 1921 76 29 х MacBook Air

Answer 1

1 A B с D Bond 1 Bond 2 2 coupon rate 8% 12% 3 time to maturity 10 10 4 Yield to maturity(YTM) 10% 10% 5 Par value(assumed) 1000 6 a) 7 YTM Next year 10% 10% 8 time to maturity 9 9 9 coupon value 80 120 10 Price of bond currently 877.11 1122.89 11 Price of bond next year 884.82 1115.18 12 Return on bond 10.00% 10.00% 13 14 b) since the time to maturity for both bonds was 10 years and 15 16 interest rates next year remain constant, both bonds will give the same return, as seen from above calculation. 17 Hence, the higher coupon bond does not give a higher 18 return over this period 19 20

A B c D 1 Bond 1 0.08 Bond 2 0.12 10 10 0.1 0.1 1000 2 coupon rate 3 time to maturity 4. Yield to maturity(YTM) 5 Par value(assumed) 6 a) 7 YTM Next year 8 time to maturity 9 coupon value 10 Price of bond currently 11 Price of bond next year 12 Return on bond 13 14 b) 0.1 0.1 =B3-1 =C3-1 =B2*$B$5 =C2*$B$5 --PV(B4,B3,B9,$B$5) --PV(C4,C3,C9,$B$5) --PV(B7,38,39,$B$5) --PV(C7,C8,C9,$B$5) =((B11-B10)+B9)/B10 =((C11-C10)+C9)/C10 15 16 since the time to maturity for both bonds was 10 years and interest rates next year remain 17 constant, both bonds will give the same return, as seen from above calculation. Hence, the higher coupon bond does not give a higher return over this period 18 19 20

A B c D 1 Bond 1 0.08 Bond 2 0.12 10 10 0.1 0.1 1000 2 coupon rate 3 time to maturity 4. Yield to maturity(YTM) 5 Par value(assumed) 6 a) 7 YTM Next year 8 time to maturity 9 coupon value 10 Price of bond currently 11 Price of bond next year 12 Return on bond 13 14 b) 0.1 0.1 =B3-1 =C3-1 =B2*$B$5 =C2*$B$5 --PV(B4,B3,B9,$B$5) --PV(C4,C3,C9,$B$5) --PV(B7,38,39,$B$5) --PV(C7,C8,C9,$B$5) =((B11-B10)+B9)/B10 =((C11-C10)+C9)/C10 15 16 since the time to maturity for both bonds was 10 years and interest rates next year remain 17 constant, both bonds will give the same return, as seen from above calculation. Hence, the higher coupon bond does not give a higher return over this period 18 19 20

To calculate return on bond next year, you have to calculate the price of bond next year, which can be calculated using the PV function in excel with inputs: Time to maturity, coupon value per year, par value of bond, YTM of bond

Return on bond = (Annual coupon value + (P1-P0))/P0

P1 = Price of bond after 1 year

P0 = current bond price

Annual coupon value = Coupon rate* par value of bond