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.($Assume that the bond has just been issued.$)$

a$.$ What is the bond's yield to maturity?

Hint: This is a nominal rate, not the effective rate. Nominal rates are generally quoted.

What is the bond's current yield?

Current yield $=$

Current yield $=$

Current yield $=$

Hint: Write formula in words.

Hint: Cell formulas should refer to Input Section

c$.$ What is the bond's capital gain or loss yield?

Cap. Gain$/$loss yield $=$

Cap. Gain$/$loss yield $=$

Cap. Gain$/$loss yield $=$

Note that this is an economic loss, not a loss for tax purposes.

d$.$ What is the bond's yield to call?

Here we can again use the Rate function, but with data related to the call.

Peridodic $YTC=$

Annualized Nominal YTC $=$

This is a nominal rate, not the effective rate. Nominal rates are generally quoted.

The YTC is lower than the YTM because if the bond is called, the buyer will lose the difference between the call price and the

current price in just $4$ years, and that loss will offset much of the interest imcome. Note too that the bond is likely to be called

and replaced, hence that the YTC will probably be earned. NOW ANSWER THE FOLLOWING NEW QUESTIONS:

e$.$ How would the price of the bond be affected by changing 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. That is an oversimplification, but assume it

anyway for purposes of this problem.$)$

Vominal market rate, $r$:

Value of bond if it's not called:

Value of bond if it's called:

The bond would not be called unless $r$ coupon.

Ne can use the two valuation formulas to find values under different r$\text{'}$s$,$ in a $2-$output data table, and then use an IF

statement to determine which value is appropriate:

Now assume the date is $10/25/2019.$ Assume further that a $12\%,10-$year bond was issued on $\frac{7}{1}\frac{?}{2019},$ pays interest

semiannually $($January $1$ and July $1),$ and sells for $$1,100.$ Use your spreadsheet to find the bond's yield.

Refer to this chapter's Tool Kit for information about how to use Excel's bond valuation functions. The model finds the price of a

oond, but the procedures for finding the yield are similar. Begin by setting up the input data as shown below: