B D G 1 Solution 2 Chapter: 3 Problem: 7/16/2015 5 24 4 5 6 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 7 $1,040. The bond sells for $1,100. (Assume that the bond has just been issued.) 8 9 Basic Input Data: 10 Years to maturity 11 Periods per year 12 Periods to maturity 13 Coupon rate: 14 Par value: 15 Periodic payment 16 Current price 17 Call price: 18 Years till callable: 19 Periods till callable 20 8% $1,000 $1,100 $1,040 5 20 What is the bond's yield to maturity? 21 a. 22 23 Peridodic YTM Annualized Nominal YTM 24 Hint: This is a nominal rate, not the effective rate. Nominal rates are ge 25 26 27 b. What is the bond's current yield? 28 29 30 Current yield Current yield Current yield Hint: Write formula in words. Hint: Cell formulas should refer to Input Section (Answer) 31 32 33 34 c. What is the bond's capital gain 35 36 Cap. Gain/loss yield 37 Cap. Gain/loss yield or loss yield? Hint: Write formula in words Hint: Cell formulas should refer to Input Section Build a Model Solution Sheet2 Sheet3 LC B D C E F G K 34 C. What is the bond's capital gain or loss yield? 35 36 Cap. Gain/loss yield 37 Cap. Gain/loss yield 38 Cap. Gain/loss yield 39 40 Note that this is an economic loss, not a loss for tax purposes. Hint: Write formula in words Hint: Cell formulas should refer to Input Section (Answer) 41 42 d. What is the bond's yield to call? 43 44 Here we can again use the Rate function, but with data related to the call. 45 46 Peridodic YTC Annualized Nominal YTC 47 This is a nominal rate, not the effective rate. Nominal rates are generally quoted 48 49 The YTC is lower than the YTM because if the bond is called, the buyer will lose the difference between the call price 50 and the current price in just 4 years, and that loss will offset much of the interest imcome. Note too that the bond is 51 likely to be called and replaced, hence that the YTC will probably be earned 52 53 NOW ANSWER THE FOLLOWING NEW QUESTIONS: 54 55 e. How would the price of the bond be affected by changing the going market interest rate? (Hint:: Conduct 56 a sensitivity analysis of price to changes in the going market interest rate for the bond. Assume that the 57 bond will be called if and only if the going rate of interest falls below the coupon rate. That is an 58 oversimplification, but assume it anyway for purposes of this problem.) 59 60 Nominal market rate, r: 61 Value of bond if it's not called: 62 Value of bond if it's called: 8% The bond would not be called unless r
