Question

Bond Valuation Exercise

(a)        Compute the price / yield of the following bonds.

(b)        Indicate which bond experiences the biggest price change (in percentage terms) when yields increase by 1%.

Issuer	Bosch	Bank of America	Nissan
Settlement	Today	Today	Today
Coupon	3.50%	2.75%	0%
Frequency coupon payment	1	2	Zero-coupon
Maturity	2 years from now	25 years from now	6 years from now
Face value	€100	$100	€100
Yield	2.2%	3.7%	6.3%
Price	….	….	….
New Yield	….	….	….
New Price	….	….	….
Percentage change	….	….	….

Answer 1

Answer a and b:

Price of bonds, new yields, new prices and percentage changes are calculated below:

As we observe Bank of America bond experiences biggest percentage change.

Workings:

Answer a:

Price of Bosch bond:

Face value = €100

Annual coupon amount = 100* 3.50% = $3.50

Years to maturity = 2 years

Yield = 2.2%

Price = PV

PV (rate, nper, pmt, fv, type)

PV (2.2%, 2, -3.50, -100, 0)

= €102.52

Price of Bank of America bond:

Semiannual coupon = $100 * 2.75%/2 =$1.375

Semiannual yield = 3.7%/2 = 1.85%

PV (1.85%, 50, -1.375, -100, 0)

= $84.59

Price of Nissan bond:

PV (6.3%, 6, 0, -100, 0)

= € 69.31

Answer b:

New Yields:

Yield of Bosch =2.2% + 1% = 3.2%

Yield of Bank of America bond = 3.7% + 1% = 4.7%

Yield of Nissan bond =5.3% + 1% = 6.3%

New prices:

Price of Bosch bond = PV (3.2%, 2, -3.50, -100, 0) = €100.57

Price of Bank of America bond = PV (2.35%, 50, -1.375, -100, 0) = $71.50

Price of Nissan bond = PV (7.3%, 6, 0, -100, 0) = € 65.52

Percentage change:

Bosch bond = (100.57 - 102.52) /102.52 = -1.90%

Bank of America bond = (71.50 - 84.59) /84.59 = -15.48%

Nissan bond = (65.52 - 69.31)/69.31 = -5.46%