$3$ Bond Valuation

Years to maturity

a$.$ Calculating the bond's yield to maturity

Periodic YTM

Annualized nominal YTM

b$.$ Calculating the bond's current yield

Current yield

Formulas

I $$\frac{N}{A}$

#N$/$A

#N$/$A

WN$/$A

c$.$ Calculating the bond's capital gain or loss yield

Capital gain$/$loss yield

d$.$ Calculating the bond's yield to call

Periodic YTC

Annualized nominal YTC

e$.$ Assume that the bond will be called if and only if the going rate of interest falls below the coupon rate.

Conducting a sensitivity analysis of price to changes in the going market interest rate for the bond

Nominal market rate

$6\%$

Bond price if it's not called #N$/$A

Bond price if it's called

$/$A

f$.$ Calculating the bond's yield

Settlement date $($today$)$

$\frac{10}{25}\frac{?}{2020}$

$\begin{array}{cc}\text{F}\text{r}\text{e}\text{q}\text{u}\text{e}\text{n}\text{c}\text{y}(semiannual\text{b}\text{o}\text{n}\text{d}\text{s})& 2\\ \text{B}\text{a}\text{s}\text{i}\text{s}(360-or365-\text{d}\text{a}\text{y}\text{y}\text{e}\text{a}\text{r})& 1\end{array}$

day year$)$

Yield to maturity

Yield to callExcel Activity: Bond Valuation

Start with the partial model in the file Ch$04$ P$24$ Build a Model.xlsx$.$ A $25-$year, $6\%$ semiannual coupon bond with a par value of $$1,000$ may be called in $8$ years at a call price of $$1,020.$ The bond sells for $$1,190.($Assume that the bond has just been issued.$)$

The data has been collected in the Microsoft Excel file below. Download the spreadsheet and perform the required analysis to answer the questions below. Do not round intermediate calculations.

Download spreadsheet Ch$04$ P$24$ Build a Model$-34$f$092.$xlsx

What is the bond's yield to maturity? Round your answer to two decimal places.

fill in the blank $2\%$

What is the bond's current yield? Round your answer to two decimal places.

fill in the blank $3\%$

What is the bond's capital gain or loss yield? Round your answer to two decimal places. Use a minus sign to enter a negative value, if any.

fill in the blank $4\%$

What is the bond's yield to call? Round your answer to two decimal places.

fill in the blank $5\%$

How would the price of the bond be affected by a change in the going market interest rate? $($Hint: Conduct a sensitivity analysis of price to changes in the going market interest rate for the bond. Assume that 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 purposes of this problem.$)$ Round your answers to the nearest cent.

Nominal market rate Actual bond price

$0\%$ $ fill in the blank $6$

$2\%$ $ fill in the blank $7$

$4\%$ $ fill in the blank $8$

$6\%$ $ fill in the blank $9$

$8\%$ $ fill in the blank $10$

$10\%$ $ fill in the blank $11$

$12\%$ $ fill in the blank $12$

$14\%$ $ fill in the blank $13$

$16\%$ $ fill in the blank $14$

Now assume the date is October $25,2020.$ Assume further that an $11\%,15-$year bond was issued on July $1,2020,$ pays interest semiannually $($on January $1$ and July $1),$ and sells for $$1,190.$ Again, it may be called in $8$ years from the date of issue at a call price of $$1,020.$ Use your spreadsheet to find the bond's yield. Round your answers to two decimal places.

Yield to maturity: fill in the blank $15\%$ it's not $9\mathrm{.}02\%$

Yield to call: fill in the blank $16\%$ it's not $7\mathrm{.}89$