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11 Section Three: Harder (3 points each) Three years ago, in 2016, you bought $100,000 Face Value of Boeing Aerospace (A Rated) 3% 10yr bonds at a YTM of 3.25%. What was the amount of your initial investment amount lie. what is their value; that's what you payl? 192,05 102.12 102,100 Three years pass, it's now 2019 (today), and the market is as outlined in Market Data What is the value of your BA holdings today? 103.71 103, 710 News is released: Boeing 737 Max aircraft has serious safety flaws. Credit spreads on all Boeing bonds widen (rise) by 100 bps. You sell your BA bonds, what cash amount do you receive for them fie. what is their value; that's what you receive)? What's the dollar gain or loss you experienced between initial purchase (question 11) and the final valuation at sale (question 13)? If you made a gain, input as positive number. If you made a loss, input as negative number 15 if back in 2016 the Boeing Bonds actually traded at a price of 99.00, what would have been their YTM? Appendix: Market Data UST Yield Curve Credit Spreads In Bps, for Rating & Maturity Зуr Syr Tyr 10yr 5 10 15 20 15 25 30 2.800 AAA AA 30yr 25 35 2.600% 55 BBB 2.400% 2. 200% Credit Spreads are quoted in bps Remember: a bps is 1/100 of 1% For example, 25 bps = 0.25% 2.000 4 5 6 7 8 9 10 30 YTM 2.250 2.410 2.550 2.670 2770 2.850 2910 2.950 2970 2970 2.970 Maturity

Answer 1

(11) Face Value (A rated Bond ) $ 100,000

Coupon Rate = 3%

Time period = 10 years

YTM = 3.25%

Value of Bond = Present Value of Interest + Present Value of Maturity

or = Int * PVAF(YTM,T) + M.V.* PVAF(YTM,T)

Assuming that the bond will mature at Face Value.

Value of Bond = 3000* PVAF(3.25%,10) + 100,000* PVAF(3.25%,10)

=3000*8.422+100,000*0.726

=$97,866

Value of Bond is $97,866

(12) In 2019, Revised YTM rate = 2.97+0.5= 3.47%

Value of bond Year 3 = 3000* PVAF(3.47%,7) + 100,000* PVAF(3.47%,7)

=3000*6.121+100,000*0.788

=$97,163

Value of bond Year 3 = $97,163

(13) Revised YTM rate = 3.47+1= 4.47%

Assuming that the news event occur in 2019

Value of bond Year 3(after news event)= 3000* PVAF(4.47%,7) + 100,000* PVAF(4.47%,7)

=3000*5.899+100,000*0.736

=$91,297

Value of bond Year 3(after news event) or sale value is $91,297

(14) Dollar gain or Loss= Sale Value - Purchase Value

= $91,297-$97,866

=($6,569)

Loss = $6,569

Note: PV factor taken for calculation upto 3 decimal places