Module 2 - SLP

STOCKS AND BONDS

Bond Valuation

This assignment contains two parts: Part I and Part II.

Part I

Answer these questions and show your work:

Assume that the company that you selected for the Module 1 SLP has a bond outstanding that matures in 20 years and has a coupon rate of 6.5%. The par value of the bond is $1,000.

If the yield to maturity is 8% and the bond pays interest on an annual basis, whats the current price of the bond? Is the bond selling for a premium or discount? How can you tell?

If the yield to maturity is 8% but the bond pays interest on a semi-annual basis instead of an annual basis, whats the current price of the bond? Is it different from the value when using annual compounding? Explain.

Now, assume that the economy enters into a recession and interest rates fall. The bonds yield to maturity is now 5%. Whats the bonds new price? How does the price compare with your answer in part a? Why did the bonds value change?

A bond matures in ten years and is currently selling for $1,125. The bond pay interest annually, has a par value of $1,000, and a yield to maturity of 10.75%. Whats the bonds current yield?

Part II:

Write a 2-page essay comparing reinvestment risk and interest rate risk and how an investor can protect his or her portfolio from those risks. Please be sure to discuss duration in your paper.

SLP Assignment Expectations

You are expected to:

Describe the purpose of the report and provide a conclusion. An introduction and a conclusion are important because many busy individuals in the business environment may only read the first and the last paragraph. If those paragraphs are not interesting, they never read the body of the paper.

Answer the SLP Assignment question(s) clearly and provide necessary details.

Write clearly and correctlythat is, no poor sentence structure, no spelling and grammar mistakes, and no run-on sentences.

Provide citations to support your argument and references on a separate page. (All the sources that you listed in the references section must be cited in the paper.) Use APA format to provide citations and references.

Type and double-space the paper

Whenever appropriate, please use Excel to show supporting computations in an appendix, present financial information in tables, and use the data computed to answer follow-up questions. In finance, in addition to being able to write well, its important to present information in a professional manner and to analyze financial information. This is part of the assignment expectations and will be considered for grading purposes.