Jenna bought a bond that was issued by Sherlock Watson Industries (SWI) three years ago. The bondhas a $1,000 maturity value, a coupon rate equal to 9 percent, and it matures in 17 years. Interest is paidevery six months; the next interest payment is scheduled for six months from today.

A)If the yield on similar risk investments is 11 percent, what is the current market value (price) of the bond?

B)Compute the capital gains yield, current yield, and total yield that Jenna will earn if she holds the bond until it matures. Assume that the market rate does not change from now until maturity.

C)Suppose that Jenna decides she wants to sell the bond seven years from today when 10 years remain until maturity. If the market rate is 8 percent at the time she sells the bond in seven years, for what price will Jenna be able to sell the bond? Compute the capital gains yield, current yield, and total yield that the new investor will earn if he or she holds the bond until it matures 10 years later. Explain why the capital gains yield is negative each year to maturity. Assume that the market rate does not change from the time Jenna sells the bond until it matures.

D)Suppose that Jenna just bought a newly issued 15-year bond with a coupon rate equal to 7 percent. If Jenna sells the bond at the end of the year when its market price is $917, (i) what would be the bond's yield to maturity and (ii) what return would she earn? What portion of the return represents capital gains and what portion represents the current yield? (iii) What return would the new investor earn in the year after James sells the bond? Assume interest is paid semiannually.

E)Suppose that James just bought the same 15-year bond that Jenna bought and at the same time. If James sells his bond five years from the day he purchased it (with 10 years remaining to maturity) for $1,074, (i) what would be the bond's yield to maturity when he sells it and (ii) what return would he earn during the time he held the bond? What portion of the return represents capital gains and what portion represents the current yield? (iii) What return would the new investor earn in the year after James sells the bond? Assume interest is paid semiannually.

C06 Chapter 6 Spreadsheet-Related Problem (C06) Bond Valuation 1. There are a number of instructions with which you should be familiar to use these computerized models. T instructions appear in a separate worksheet labeled INSTRUCTIONS. If you have not already done so, you s these instructions now. To read these instructions, click on the worksheet labeled INSTRUCTIONS. 2. A graph that shows the composition of the total yield, r d, can be displayed if you click the worksheet labeled at the bottom of this spreadsheet. To return to this worksheet, click on the worksheet labeled C06 at the botto GRAPH worksheet. 3. The model is set up so that you can solve for bonds with maturitues up to 20 years. PARTS a - c INPUT DATA: Years remaining to maturity Coupon rate of interest Interest payments per year Market rate (yield to maturity), rd Maturity value KEY OUTPUTS: Current price (P0) Capital gains yield this year Current yield this year Total yield this year 14 10% 1 10% $1,000 MODEL-GENERATED DATA: Years to Beginning of Year Maturity Value ($) 20 19 18 17 16 15 14 $1,000.00 13 $1,000.00 12 $1,000.00 11 $1,000.00 10 $1,000.00 9 $1,000.00 8 $1,000.00 7 $1,000.00 6 $1,000.00 5 $1,000.00 End of Year Value ($) Capital Gains Capital Gains ($) Yield (%) $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Page 1 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Interest ($) $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 4 3 2 1 0 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 C06 $1,000.00 $1,000.00 $1,000.00 $0.00 $0.00 $0.00 $0.00 0.00% 0.00% 0.00% 0.00% $100 $100 $100 $100 PART d INPUT DATA: Original maturity (years) Coupon rate of interest Interest payments per year Maturity value Market rate, YTM Purchase price Selling price Number of years held KEY OUTPUTS: 15 9% 2 $1,000 10.00% $923.14 $1,000.00 3 Yields to new investor (buyer): Yield to maturity, rd Market price one year after sale Dollar capital gains next year Capital gains yield next year Current yield next year Total yield next year Yields to the original investor (Assumes the market rate, YTM, remains the same each year the bond is held a the bond was purchased, except in the final year.) # Years Bond Beginning of Year End of Year Capital Gains Capital Gains was Held Value ($) Value ($) ($) Yield (%) 1 $923.14 $925.51 $2.37 0.26% 2 $925.51 $928.12 $2.61 0.28% 3 $928.12 $1,000.00 $71.88 7.74% 4 5 Interest ($) $90 $90 $90 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web or in part. Page 2 C06 omputerized models. These already done so, you should read RUCTIONS. k the worksheet labeled GRAPH beled C06 at the bottom of the $1,000.00 0.00% 10.00% 10.00% Current Yield Total Yield (%) (%) 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% Page 3 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% C06 (buyer): after sale 9.00% $1,000.00 $0.00 0.00% 9.00% 9.00% year the bond is held as when Current Yield Total Yield (%) (%) 9.75% 10.01% 9.72% 10.01% 9.70% 17.44% a publicly accessible website, in whole Page 4 GRAPH 20.0% 15.0% 10.0% 5.0% 0.0% 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 -5.0% -10.0% CFIN4 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessi whole or in part. Page 5 5 GRAPH Capital Gains Yield Current Yield 4 3 2 1 0 , or posted to a publicly accessible website, in Page 6 GENERAL INSTRUCTIONS FOR COMPUTERIZED PROBLEM SOLUTIONS We have already entered the base case data for each model in this file, and the models have performed the analysis for preceding parts of the problem. You will need to enter the data for each of the remaining parts of the problem--we indicate in each problem the parts that should be done using the spreadsheet. However, there are several points worth noting before you go into a model: 1. The input data are entered in specified cells in the INPUT DATA section. When you change an input item, the model automatically recalculates the values of appropriate output data items, unless you are told otherwise. If the values do not change automatically, press the F9 key to recompute the values. 2. The key output data are displayed to the right of the INPUT DATA section or immediately below it. This placement permits you to change an input and instantly see how that change affects the output of the model. This is extremely useful in sensitivity analysis. 3. Input data items that you can change are distinguished from the ones you should not change. The items that you can change are highlighted in color (blue) whereas the other items are printed in black. 4. All percentages must be entered as decimals. Dollars and other numbers must be entered without dollar signs or commas. 5. Instructions and comments concerning specific models accompany each model. Graphs associated with the model are included in another worksheet that can be accessed by clicking on the worksheet labeled GRAPH at the bottom of the spreadsheet. CFIN4 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part