AutoSave OFF Business Finance Assignment 3 - Save Review View Tell me me Insert Draw Page Layout Formulas Data X Arial 10 v General y A M Au aste B I Uv $ % v 8-98 6 x fx A B D E F G H J K 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.) Basic Input Data: Years to maturity 20 Periods per year 2 Periods to maturity 40 Coupon rate: 8% Par value: $1,000 Periodic payment $40 3 Current price $1,100 4 Call price $1,040 5 Yearstill callable: 5 6 Periods til calable: 10 7 8. What is the band's yield to maturity? 19 20 Peridodic YTM 21 Annualized Nominal YTM 22 3.53% 7.06% Hint: This is a nominal rate, not the effective rate. Nominal rates are generally quoted. Hint Wite fomula in words. Hint: Cel formules should refer to Input Section (Answer 24 b. What is the band's current yield? 25 26 Current yield - 27 Current yield - 1 28 Current yield 20 30 31 c. What is the band's capital gain or loss yield? 32 33 Cap. Gainess yield 34 Cap. Galloss yield 35 Cap. Gainless yield- Hint Write formula in wont Hint Cel formules should refer to Input Section (Answer 37 Note that this is an economic loss, not a loss for tax purposes 30 d. What is the band's yield to call? 40 41 Here we can again the Rate function, but with data to the cal 42 Build a Model Solution Sheet2 Sheet3 15 8 S Poh AUTOSave Home Insert Draw Page Layout Formulas Data Review View Tell me X v an Arial 10 ' General Paste B I U a. Av $ % 9 C26 fx B D E F H G 1 J 1 2. 3 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. 4 The bond sells for $1,100. (Assume that the bond has just been issued.) 5 6 Basic Input Data: 7 Years to maturity 20 8 Periods per year 2 9 Periods to maturity 40 10 Coupon rate: 8% 11 Par value $1,000 12 Periodic payment $40 13 Current price $1,100 14 Call price $1,040 15 Years til calable: 5 16 Periods to calable 10 17 18 a. What is the bond's yield to maturity? 19 20 Peridodic YTM 3.53% 21 Annualized Nominal YTM 7.05% Hint: This is a nominal rato, not the effective rate. Nominal rates are generally quoted. 22 23 24 b. What is the band's current yield? 23 26 Current yield Hint: Write formula in words. 27 Current yield- Hint: Cel formulas should refer to Input Section Current yield 1 Answers 29 30 31 6. What is the band's capital gain or loss yield? 32 Cap. Gainoss yield Hint: Write formula in words 34 Cap. Gairloss yield Hint Cel fons should refer to Input Section 35 Cap. Gainose yield- (Answer 38 37 Note that this is an economic loss, not a loss for tax purposes 39 d. What is the bond yield to call? 40 41 Here we can manuse the Rate function, but with data rated to the call 42 Build a Model Solution Sheet2 Shoot + 158 44 51 36 37 Note that this is an economic loss, not a loss for tax purposes. 38 39 d. What is the bond's yield to call? 40 41 Here we can again use the Rate function, but with data related to the call. 42 43 Peridodic YTC Annualized Nominal YTC This is a nominal rate, not the effective rate. Nominal rates are generally quoted. 45 46 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 47 current price in just 4 years, and that loss will offset much of the interest income. Note too that the bond is likely to be called 48 and replaced, hence that the YTC will probably be eamed. 49 50 NOW ANSWER THE FOLLOWING NEW QUESTIONS: 52 e. How would the price of the bond be affected by changing the going market interest rate ? (Hint: Conduct a sensitivity 53 analysis of price to changes in the going market interest rate for the bond. Assume that the bond will be called if and 54 only if the going rate of interest falls below the coupon rate. That is an oversimplification, but assume it anyway for 55 purposes of this problem.) 57 Nominal market rate, r: 8% 58 Value of bond if it's not called: 59 Value of bond if it's called: The bond would not be called unless rccoupon 60 61 We can use the two valuation formulas to find values under different I's, in a 2-output data table, and then use an IF 62 statement to determine which value is appropriate: 63 84 Value of Bond it: Actual value, 65 Not called Called considering 56 Rate, $0.00 $0.00 call like hood: 0% 68 2% 69 4% 70 71 56 Build a Model Solution Sheet2 Sheet3 + AutoSave OFF Business Finance Assignment 3 - Save Review View Tell me me Insert Draw Page Layout Formulas Data X Arial 10 v General y A M Au aste B I Uv $ % v 8-98 6 x fx A B D E F G H J K 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.) Basic Input Data: Years to maturity 20 Periods per year 2 Periods to maturity 40 Coupon rate: 8% Par value: $1,000 Periodic payment $40 3 Current price $1,100 4 Call price $1,040 5 Yearstill callable: 5 6 Periods til calable: 10 7 8. What is the band's yield to maturity? 19 20 Peridodic YTM 21 Annualized Nominal YTM 22 3.53% 7.06% Hint: This is a nominal rate, not the effective rate. Nominal rates are generally quoted. Hint Wite fomula in words. Hint: Cel formules should refer to Input Section (Answer 24 b. What is the band's current yield? 25 26 Current yield - 27 Current yield - 1 28 Current yield 20 30 31 c. What is the band's capital gain or loss yield? 32 33 Cap. Gainess yield 34 Cap. Galloss yield 35 Cap. Gainless yield- Hint Write formula in wont Hint Cel formules should refer to Input Section (Answer 37 Note that this is an economic loss, not a loss for tax purposes 30 d. What is the band's yield to call? 40 41 Here we can again the Rate function, but with data to the cal 42 Build a Model Solution Sheet2 Sheet3 15 8 S Poh AUTOSave Home Insert Draw Page Layout Formulas Data Review View Tell me X v an Arial 10 ' General Paste B I U a. Av $ % 9 C26 fx B D E F H G 1 J 1 2. 3 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. 4 The bond sells for $1,100. (Assume that the bond has just been issued.) 5 6 Basic Input Data: 7 Years to maturity 20 8 Periods per year 2 9 Periods to maturity 40 10 Coupon rate: 8% 11 Par value $1,000 12 Periodic payment $40 13 Current price $1,100 14 Call price $1,040 15 Years til calable: 5 16 Periods to calable 10 17 18 a. What is the bond's yield to maturity? 19 20 Peridodic YTM 3.53% 21 Annualized Nominal YTM 7.05% Hint: This is a nominal rato, not the effective rate. Nominal rates are generally quoted. 22 23 24 b. What is the band's current yield? 23 26 Current yield Hint: Write formula in words. 27 Current yield- Hint: Cel formulas should refer to Input Section Current yield 1 Answers 29 30 31 6. What is the band's capital gain or loss yield? 32 Cap. Gainoss yield Hint: Write formula in words 34 Cap. Gairloss yield Hint Cel fons should refer to Input Section 35 Cap. Gainose yield- (Answer 38 37 Note that this is an economic loss, not a loss for tax purposes 39 d. What is the bond yield to call? 40 41 Here we can manuse the Rate function, but with data rated to the call 42 Build a Model Solution Sheet2 Shoot + 158 44 51 36 37 Note that this is an economic loss, not a loss for tax purposes. 38 39 d. What is the bond's yield to call? 40 41 Here we can again use the Rate function, but with data related to the call. 42 43 Peridodic YTC Annualized Nominal YTC This is a nominal rate, not the effective rate. Nominal rates are generally quoted. 45 46 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 47 current price in just 4 years, and that loss will offset much of the interest income. Note too that the bond is likely to be called 48 and replaced, hence that the YTC will probably be eamed. 49 50 NOW ANSWER THE FOLLOWING NEW QUESTIONS: 52 e. How would the price of the bond be affected by changing the going market interest rate ? (Hint: Conduct a sensitivity 53 analysis of price to changes in the going market interest rate for the bond. Assume that the bond will be called if and 54 only if the going rate of interest falls below the coupon rate. That is an oversimplification, but assume it anyway for 55 purposes of this problem.) 57 Nominal market rate, r: 8% 58 Value of bond if it's not called: 59 Value of bond if it's called: The bond would not be called unless rccoupon 60 61 We can use the two valuation formulas to find values under different I's, in a 2-output data table, and then use an IF 62 statement to determine which value is appropriate: 63 84 Value of Bond it: Actual value, 65 Not called Called considering 56 Rate, $0.00 $0.00 call like hood: 0% 68 2% 69 4% 70 71 56 Build a Model Solution Sheet2 Sheet3 +