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 20 2 Basic Input Data: Years to maturity: Periods per year: Periods to maturity: Coupon rate: Par value: Periodic payment: Current price Call price: Years till callable: Periods till callable: 87 $1,000 $1,100 $1,040 5 a. What is the bond's yield to maturity? Peridodic YTH = Annualized Nominal YTH = Hint: This is a nominal rate, not the effective rate. Nominal rates are generally quoted. b. What is the bond's current yield? Current yield = Current yield = 1 Current yield = Hint: Write formula in words. Hint: Cell formulas should refer to Input Section (Answer) c. What is the bond's capital gain or loss yield? Gain/loss yield = Gain/loss yield = Gain/loss yield = Hint: Write formula in words. Hint: Cell formulas should refer to Input Section (Answer) 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 YTMbecause 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 bondis likely to be called and replaced hence that the YTC will probably be earned. Build a Model Sheet2 Sheet3 + 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 Nominal market rate,r: 87. Value of bond if it's not called: Value of bond if it's called: The bond would not be called unless (coupon. We can use the two valuation formulas to find values under different ris, in a 2-output datatable, and then use an IF statement to determine which value is appropriate: Value of Bond If: ctual value, Not called Called ponsidering Rate, $0.00 $0.00 call likehood: 07 $0.00 $0.00 $0.00 27. $0.00 $0.00 $0.00 4% $0.00 $0.00 $0.00 6% $0.00 $0.00 $0.00 87 $0.00 $0.00 $0.00 10% $0.00 $0.00 $0.00 127 $0.00 $0.00 $0.00 14% $0.00 $0.00 $0.00 16% $0.00 $0.00 $0.00 f. Nox assume the date is 10/25/2010. Assume further that a 127, 10-year bond vas issued on 7/1/2010, pays interest semiannually (January 1 and July 1), and sells for $1,100. Use your 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 bond, but the procedures for finding the yield are similar. Begin by setting up the input data as Basic info: Settlement (today) Maturity Coupon rate Current price 1% of par) Redemption (% of par value) Frequency (for semiannual) Basis (360 or 365 day year) Yield to Maturity: Hint: Use the Yield function. For dates, either refer to cells D122 and D123, or enter the date in quotes, such as "10/25/2010". 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 20 2 Basic Input Data: Years to maturity: Periods per year: Periods to maturity: Coupon rate: Par value: Periodic payment: Current price Call price: Years till callable: Periods till callable: 87 $1,000 $1,100 $1,040 5 a. What is the bond's yield to maturity? Peridodic YTH = Annualized Nominal YTH = Hint: This is a nominal rate, not the effective rate. Nominal rates are generally quoted. b. What is the bond's current yield? Current yield = Current yield = 1 Current yield = Hint: Write formula in words. Hint: Cell formulas should refer to Input Section (Answer) c. What is the bond's capital gain or loss yield? Gain/loss yield = Gain/loss yield = Gain/loss yield = Hint: Write formula in words. Hint: Cell formulas should refer to Input Section (Answer) 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 YTMbecause 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 bondis likely to be called and replaced hence that the YTC will probably be earned. Build a Model Sheet2 Sheet3 + 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 Nominal market rate,r: 87. Value of bond if it's not called: Value of bond if it's called: The bond would not be called unless (coupon. We can use the two valuation formulas to find values under different ris, in a 2-output datatable, and then use an IF statement to determine which value is appropriate: Value of Bond If: ctual value, Not called Called ponsidering Rate, $0.00 $0.00 call likehood: 07 $0.00 $0.00 $0.00 27. $0.00 $0.00 $0.00 4% $0.00 $0.00 $0.00 6% $0.00 $0.00 $0.00 87 $0.00 $0.00 $0.00 10% $0.00 $0.00 $0.00 127 $0.00 $0.00 $0.00 14% $0.00 $0.00 $0.00 16% $0.00 $0.00 $0.00 f. Nox assume the date is 10/25/2010. Assume further that a 127, 10-year bond vas issued on 7/1/2010, pays interest semiannually (January 1 and July 1), and sells for $1,100. Use your 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 bond, but the procedures for finding the yield are similar. Begin by setting up the input data as Basic info: Settlement (today) Maturity Coupon rate Current price 1% of par) Redemption (% of par value) Frequency (for semiannual) Basis (360 or 365 day year) Yield to Maturity: Hint: Use the Yield function. For dates, either refer to cells D122 and D123, or enter the date in quotes, such as "10/25/2010