BOND VALUATION 2 See below for the information for Bond A and Bond B which you are considering to add to your fixed-income portfolio 3 (assume coupons are paid quarterly) 4 5 Bond A Bond B 3/15/2019 3/15/2039 3.50 % 6 Settlement Date 3/15/2019 3/15/2034 7 Maturity Date 8 Coupon Rate 9 Market Price 10 Face Value 7.50% 870 1,000.00 $ 4.50 % 1,020 1,000.00 5.50% 11 Required Return 12 Frequency 4 4 13 14 Questions: 15 1. Using the PRICE function to calculate the intrinsic value of each bond. Are these two bonds currently over-valued or under-valued? 16 17 2. Calculate the current yield and the yield to maturity of each bond. 18 19 3. Calculate the duration and modified duration of each bond. 20 21 4. What would be the intrinsic values if you expect market rates to rise by 2% and fall by 2 % across the maturity spectrum? What would be the actual percentage price changes of each bond in the cases of both expected market rates rise by 2 % and fall by 2 % ? 23 (Hint: Using the PRICE function to calculate the intrinsic values of both bond A and bond B. Then you will calcuate actual price percentage change) 22 24 25 5. Based on the actually percentage price changes, which bond would you rather own and why? 26 27 6. Based on modified duration, what would be the estimated percentage price changes of each bond in the cases of both expected market rates rise by 2 % and fall by 2 % ? (Hint: Estimated Price Percentage Price Change--Modified Duration "change in required yields) 28 29 30 7. When using modified duration to calculate estimated price percentage change, will you overestimate or underestimte price percentage change 31 in the cases of expected market rates rise by 2 % or fall by 2 %? Why does this overestimation or underestimation happen? 32