a 2. After recently receiving a bonus, you have decided to add some bonds to your investment portfolio. You have narrowed your choice down to the following bonds (assume semiannual payments): Settlement Date Maturity Date Coupon Rate Market Price Face Value Required Return Bond A 8/15/2020 2/15/2031 5.00% $975 $1,000 5.35% Bond B 8/15/2020 11/15/2040 6.50% $1,062 $1,000 5.90% Bond C 8/15/2020 12/15/2050 7.6096 $1,103 $1,000 7.50% a. Using the PRICE function, calculate the intrinsic value of each bond. Are any of the bonds currently undervalued? How much accrued interest would you have to pay for each bond? b. Calculate the current yield of each bond. Is this the total return that you would earn each year? If you were on a fixed income, would you care about this number? c. Using the YIELD function, calculate the yield to maturity of each bond using the current market prices. How do the YTMs compare to the current yields of the bonds? d. Calculate the duration and modified duration of each bond. Create a chart that shows both measures versus term to maturity. Does duration increase lincarly with term? If not, what relationship do you see? e. Calculate the convexity of each of the three bonds using the approximate convexity formula (10-11) from page 333. Now use the FAME_Convexity func- tion. Do you get the same results? f. Which bond would you rather own if you expect market rates to fall by 2% for all bonds? What if rates will rise by 2%? Why? Settlement Date Maturity Date Coupon Rate Price Face Value Required Return Frequency Bond A Bond B Bond C 8/15/2020 8/15/2020 8/15/2020 2/15/2031 11/15/2040 12/15/2050 5.00% 6.50% 7.60% $ 975.00 $ 1,062.00 $ 1,103.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 5.35% 5.90% 7.50% 2 2 2 Intrinsic Value Under/Over Valued Accrued Interest Current Yield Yield to Maturity Previous Coupon Date YearFrac Accrued Interest a 2. After recently receiving a bonus, you have decided to add some bonds to your investment portfolio. You have narrowed your choice down to the following bonds (assume semiannual payments): Settlement Date Maturity Date Coupon Rate Market Price Face Value Required Return Bond A 8/15/2020 2/15/2031 5.00% $975 $1,000 5.35% Bond B 8/15/2020 11/15/2040 6.50% $1,062 $1,000 5.90% Bond C 8/15/2020 12/15/2050 7.6096 $1,103 $1,000 7.50% a. Using the PRICE function, calculate the intrinsic value of each bond. Are any of the bonds currently undervalued? How much accrued interest would you have to pay for each bond? b. Calculate the current yield of each bond. Is this the total return that you would earn each year? If you were on a fixed income, would you care about this number? c. Using the YIELD function, calculate the yield to maturity of each bond using the current market prices. How do the YTMs compare to the current yields of the bonds? d. Calculate the duration and modified duration of each bond. Create a chart that shows both measures versus term to maturity. Does duration increase lincarly with term? If not, what relationship do you see? e. Calculate the convexity of each of the three bonds using the approximate convexity formula (10-11) from page 333. Now use the FAME_Convexity func- tion. Do you get the same results? f. Which bond would you rather own if you expect market rates to fall by 2% for all bonds? What if rates will rise by 2%? Why? Settlement Date Maturity Date Coupon Rate Price Face Value Required Return Frequency Bond A Bond B Bond C 8/15/2020 8/15/2020 8/15/2020 2/15/2031 11/15/2040 12/15/2050 5.00% 6.50% 7.60% $ 975.00 $ 1,062.00 $ 1,103.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 5.35% 5.90% 7.50% 2 2 2 Intrinsic Value Under/Over Valued Accrued Interest Current Yield Yield to Maturity Previous Coupon Date YearFrac Accrued Interest
