Bond valuations and yields: What do they mean, and how do you derive their values? Consider the following case of investment-grade bonds issued by Procter & Gamble Co. (P&G) in August 2011 Issue Details callable Proctor and Gamble's total amount of Issue Size ($ Mil) Maturity Date $1,000 08/15/2014 Coupon Coupon Type Yes debt increased from 31.9% in March 2011 to 34.2% in December 2011 Coupon Frequency mainly due to its net debt issuances to 0.700% Fixed Semiannually fund general corporate purposes. What was the annual cost of the funds to P&G raised from the $1.0 billion bonds that mature in 2014? 7 basis points Historical Treasury Rates If the bond sold at 10010 at the time of ANSWER CHOICES . 2 Year Nominal 5 Year Nominal Difference issue, investors observed that required annual yield would be 0.67% 1. A, B, C, D Looking at the comparable U.S. Treasury 2. A, B, C, D yield, these bonds were issued at a 3. Decline, Gain spread of 51 basis points. 0.79% 1.0 4. Increase, Decrease 0.19% Because the coupon rate is greater than the yield required by the market, the bond sold at premium at the time of issue Aug. Nov. Dec. July 2011 Jan. 2012 Time Period If the new observed yield of the bond is 1.3%, the bond is likely to be trading at a price of $97.88 If the current yield is higher than the coupon rate, investors would want a higher return on their investment. If the coupon rate is less than the yield required by the market, the price of the bond is most likely to be less than the par value of the bond, and the bond wi Sel at discount As interest rates increase, the yield required by the market will increase, and the price of the bond is likely to decrease Thus, when the yield increases to 1.3%, the bond's price dect es by 2.12% Understanding yield to call and when bonds are called Suppose the bond had a call structure that allowed the company to call its bonds after one year. The call structure of the bonds states that the bonds would be callable at par. What would be the yield to call? In what situation would the company call the bond? 1 A O 2.498% Bo 1598% Co 1.785% Do 1.054% 2 Ao when interest rates rise Bo When interest rates fall CO when the bond's price rises Do When current yield on the bonds falls From an investor's perspective, if the investor holds these P&G bonds in their portfolio and market interest rates rise, the bonds' value in the fixed-in icome asset class in the portfolio wi most likely but if market interest rates fa the value of bonds in the portfolio wi