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.
  KV ASSIGNMENT 3 - Saved Kayla Vasquez 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 . Unhideǐn Reset Window Position Windows Workbock Views Show Zoom iACCOUNT NOTICE We've run into a problem with your Office 365 subscription and we need your help to fix it Reactivate D20 0 NOW AN THE FOLLOWING NEW 2 How would the price of the bond be afreeted by enanging the going market interest rate? Hint: Conduet 53 sensitvity analysis of pnoe to changes in the going market intere t tate for tho bond. Assume that the bond 111 be 4 salled if and ony I the going rate ot interest falls below the coupon rate. That is an oversimplitication, but assume 30 it anyway for purposes of this probien.) Noanal maket rate, r e of bond eIt's called: c The bond wuld not be caled uness repoupon 62 statement to celemine which alue s appropriate TG t. Now assume th date is 10/25/2014. Assume turther that ฮ 12%, 10-ear bond was issued on 7r1/2014, pays o interest semiannualy (January 1 and July 1)and sells tor $1,140. Use your sprezdsheet to find the bond's yield. 85 Setement (today) 86 Matrr Call prce 90 Frequency or semianu) 01 Bass (360 or365 day year) 4 ield to Maturity 05 96 97 TO 1na the yie to ca.. gseme YELD runcsen. tUTwith the ca·price farer tren par vake as the redempton 90 Us" the ทre trtonF" dates nther reser to cens D122 and D123. grener the date n gotes tAKft สะ"10/25/2014" 101 You coabdaro use Excer9 .Price-trct。, to find the vaue of a bona between inte eel pement dates os Build a Model Solution Sheet2 Sheet3G +70% 10-54 PM O Type here to search
  

Answer 1

C - 8% semi annual is 4%

F - 1000

P - 1100

n - 20 yrs semiannual is 40 yrs

YTM - 7.06%

• Bond current yield = annual coupon /current bond price

Annual coupon - 80

Current bond price - 1100

(80/100)*100 = 7.272 %

• Capital gain yield = (p1 - p0)/p0

P1 - market price

P0 - initial price

(1100 - 1000)/ 1000 * 100 = 10%

• Same as ytm formula

C - 4 %

F - 1000

P - 1040

N - 5 yrs semiannual is 10 yrs

YTM - 6=33%