Question

You are interested in investing in some corporate bonds from companies that have been severely hurt by the Covid virus. You do some research and find there are five companies whose bonds are currently yielding around 20%. Each of the bonds is described in the table below. Answer the questions that follow. You may use Excel if you wish, although with some time on a calculator you can answer each of the questions. If you do use Excel I still want to see your work: formulas used, sub-amounts calculated, etc.

	Coupon	YTM	Maturity Date	Face Amount
Bond 1	8%	20%	2025	$10,000
Bond 2	10%	18%	2025	$20,000
Bond 3	12%	28%	2025	$5,000
Bond 4	12%	20%	2025	$10,000
Bond 5	10%	22%	2025	$10,000

a. What is the price of each bond? What is your total investment amount?

b. What is the par value of each bond?

c.Assume you purchase one of each bond. i. What is the YTM of your portfolio? ii. Assume that one week after you purchase the bonds, the company that issued Bond 5 defaults and never pays you one cent of principal or interest. Assume further that all the other bonds pay interest (annually) and principal according to the terms. What would your YTM turn out to be?

d. What would your YTM have been if you invested in Bond 3 ONLY?

e. What would your YTM have been if you invested in Bond 1 ONLY?

f. Using your answers to d. and e. and any other concepts we’ve covered in class, describe the difference and expected outcomes of following each of these strategies: i. Buying one of the bonds in enough quantity to approximate your total investment from a. above, or ii. Buying one of each bond. When answering this question, you can and should use some of the numbers you obtained in answering the earlier questions, but this question is primarily descriptive and conceptual, bolstered by numbers to illustrate your point. This is an “explain it to your little brother” answer. A paragraph should do it.

g. Consider bonds 3 and 4. They have the same coupon and the same maturity date. Why then do they have different YTMs? Or must that be a mistake? I urge you to try to do this problem using Excel, but if you don’t have Excel or are a complete novice and have no interest in learning, it can be done by hand, although your answer to the pre- and post-default YTM question will be a bit rougher – you should be able to get to within a percent or two.

Answer 1

Solution :

Bond	Coupon	YTM	Maturity Dt.	Face Value/ Par Value	Price
Bond 1	8%	20%	2025	$10,000	$6412
Bond 2	10%	18%	2025	$20,000	$14,994
Bond 3	12%	28%	2025	$5,000	$2,974
Bond 4	12%	20%	2025	$10,000	$7,608
Bond 5	10%	22%	2025	$ 10,000	$6,564
				Total	$38,552

Detailed Solution below:

PG1:

Price IBOND Value Solce Assumption: Cussent year is 2020 PAR value , Maturitul Face I Coupon ym Dated Band 1 | 84 2014 2025 $19.000 $6,412 * 2 | 107 | 187 2025 $22,000 $14,994 a 3 | 12:1. 281. 2025 $5000 $.2974 - 4 1.127. 201, 2025 $10000 $ 7608 ns1 104 | 227 2025 $1,000 $6564 . . 1 Totall Inismil $38,552 Price of Bond. - FORMULA (P) Prices Coupon Payment & VAF & Redemption x Prif 81. =) YTM n =) no of years. PUAr present value annuity factor PRIFT present value interest facto CPART 3 PUIG Böre 13 p (201,5 = (800x 2.99 ) + (10,000 to Goal >$6412 ch Valie Ul. 00x8.1. 000X811.) x PVA (201., 5) PUAF 10,000

PG2 :

Pg2 (184,5) Barcl2 => Pop 2000x PVAFLs) +20,000 x PUZ C1814,5) $14,994 OXPUIR Bond3=) P s GOO x PVAR (287,5 ) + 5000 XPVIF (286).,5) - $2444 Bond 4 > fo= 1200 x PVAfzal,s) + 10,000 PUZCOA) - $7608 PUIR borals P 1000 x PVA F. (22*1,5) +10.000x PVZET (227.,8) 5 $6564 Part b} par value as Face value bond. is the same of each

PG 3:

« o что ее + gього YTM is the weighted average (based on market price) for yield each bond. yom=16412 1994 x (18) +12974 x(28) 28,552 learn more a cap 120.com 38,552 138,552 Bendl . Banda Bond 3 +7668 x 207 +1 6564 x 22 [ 38.552 | 38,552 Båndh Bonds • 20.18.4 2. YTM of portfolio is 20.18) & Parte 2 yM in case of default of Bonds yiM = [6412 x 207 + 14,994 x18] + [2974 x 131988 31988 31988 2 19.81.1.

PG4 :

(Part 3 of looy funds invested of in Bond az, only =) YTM? of loot feeds invested in Bond 3 then the portfolio would have Only consisted of Bond 3' f ЗҮМ о Bohd" 3 ср 28 1. из portfolio you. {Parte; Similarly if only investment is Similarly Bond 't' then you of Bond I of 20% will be the portfolio YTM .