I would like the answers for these case study questions showing clearly how they are calculated.
Issuer |
Face Value |
Coupon Rate
|
Rating |
Quoted Price $ |
Years Until Maturity |
Sinking Fund |
Call Period |
ABC Energy |
1000 |
6% |
AAA |
809.10 |
20 |
Yes |
3 Yrs |
ABC Energy |
1000 |
0% |
AAA |
211.64 |
20 |
Yes |
N/A |
Trans Power |
1000 |
10% |
AA |
1025.00 |
20 |
Yes |
5 Yrs |
Telco Utilities |
1000 |
12% |
AA |
1300.00 |
30 |
No |
5 Yrs |
1. One of Jill's best clients poses the following question: If I buy 10 of each of these bonds, reinvest any coupons received at the rate of 6% per year, and hold them until they mature, what will my realized return be on each bond investment? How should Jill go about demonstrating the solution to this question?
2. Why is there so much variation in the coupon rates and prices of these various bonds? asks one of Jill's wealthiest clients. How should Jill respond?
1). First, we need to find the Future Value (FV) of the coupons reinvested:
ABC Energy: PMT = coupon rate*face value/2 = 6%*1,000/2 = 30; rate (reinvestment rate) = 6%/2 = 3%; N = 20 years*2 = 40 (since payments are semi-annual), CPT FV. FV = 2,262.04
ABC Energy: FV = 0 since it is a zero-coupon bond
Trans Power: PMT = coupon rate*face value/2 = 10%*1,000/2 = 50; rate (reinvestment rate) = 6%/2 = 3%; N = 20 years*2 = 40 (since payments are semi-annual), CPT FV. FV = 3,770.6
Telco Utilities: PMT = coupon rate*face value/2 = 12%*1,000/2 = 60; rate (reinvestment rate) = 6%/2 = 3%; N = 30 years*2 = 60 (since payments are semi-annual), CPT FV. FV = 4,524.08
The semi-annual realized return is calculated as { [(FV of the coupons reinvested + face value received at maturity)/Bond price]^(1/n) } - 1
So, the annual realized return will be twice of this.
Formula | (a) | (b) | ('c) | (d) | {[(a+b)/c]^d}-1 | Semi-annual return*2 |
Issuer | FV of coupons reinvested | Face value | Bond price | Number of payments | Semi-annual return | Annual return |
ABC Energy | 2,262.04 | 1,000 | 809.10 | 40 | 3.55% | 7.09% |
ABC Energy | - | 1,000 | 211.64 | 40 | 3.96% | 7.92% |
Trans Power | 3,770.06 | 1,000 | 1,025.00 | 40 | 3.92% | 7.84% |
Telco Utlities | 4,524.08 | 1,000 | 1,300.00 | 60 | 2.44% | 4.88% |
2). Coupon rates depend on the credit rating of the issuer. Higher the credit rating (implies lower risk), lower will be the coupon rate and lower the credit rating (implying higher risk), greater will be the coupon rate. Additionally, bonds will also carry call risk (if they are callable), maturity risk, reinvestment risk and the risk effect of the sinking fund provision. A callable bond with greater maturity period and no sinking fund provision (as given in the table) like Telco Utilities is the riskiest of the lot and that is reflected in its quoted price which is also the highest.
I would like the answers for these case study questions showing clearly how they are calculated. Issuer Face Val...
Calculate the annual coupon payment for the bonds listed below Issuer Face Value Coupon Rate Rating Quoted Price Years until Maturity Sinking Fund Call Period ABC Energy $1,000.00 5% AAA $703.10 20 Yes 3 Years ABC Energy $1,000.00 0% AAA $208.30 20 Yes Na TransPower $1,000.00 10% AA $1092.00 20 Yes 5 Years Telco Utilities $1,000.00 11% AA $1206.40 30 No 5 Years
Calculate the yield to maturity for the 4 bonds listed below Issuer Face Value Coupon Rate Rating Quoted Price Years until Maturity Sinking Fund Call Period ABC Energy $1,000.00 5% AAA $703.10 20 Yes 3 Years ABC Energy $1,000.00 0% AAA $208.30 20 Yes Na TransPower $1,000.00 10% AA $1092.00 20 Yes 5 Years Telco Utilities $1,000.00 11% AA $1206.40 30 No 5 Years
Calculate the current yield for the 4 bonds below Issuer Face Value Coupon Rate Rating Quoted Price Years until Maturity Sinking Fund Call Period ABC Energy $1,000.00 5% AAA $703.10 20 Yes 3 Years ABC Energy $1,000.00 0% AAA $208.30 20 Yes Na TransPower $1,000.00 10% AA $1092.00 20 Yes 5 Years Telco Utilities $1,000.00 11% AA $1206.40 30 No 5 Years
HW 10 Bond Analysis and Valuation Corporate Bonds-They Are More Complex Than You Think Jill Dougherty was hired as an investment analyst by A.M. Smith Inc. for the Cincinnati, Ohio office based on her sound academic credentials, which included an MBA from a top ranking university and a CFA designation. At the time of her recruitment she was told that one of her responsibilities would be to conduct educational seminars for current and prospective clients. A.M. Smith Inc., a prestigious...