This bond is 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 $1,040. The bond sells for $1,100. (Assume that the bond has been issued.) Please complete the partial model. You need the following to be answered.
D) What is the bond's yield to call? Explain in words how you solved for Peridodic YTC and Annualized Nominal YTC ?
E)How would the price of the bond be affected by a change in the going market interest rate? (Hit: Conduct a sensitivity analysis of price to changes in the going market rate for the bond. Assume the bond will be called if and only if the going rate of interest falls below the coupon rate. This is an oversimplification, but assume it for the purpose of this problem.) Explain in words the Value of a bond if it's not called and the Value of a bond if it's called.
F)Now assume the date is October 25, 2020. Assume further that a 12%, 10-year bond was issued on July 1, 2020, pays interest semiannually (on January 1 and July 1), and sells for $1,000. Use the attached spreadsheet to find the bond's yield. Explain in words how you solved for Yield to Maturity and Yield to call ?
| Basic Input Data: | |
| Years to maturity: | 20 |
| Periods per year: | 2 |
| Periods to maturity: | 40 |
| Coupon rate: | | 8% |
| Par value: | | $1,000 |
| Periodic payment: | $40 |
| Current price | | $1,100 |
| Call price: | | $1,040 |
| Years till callable: | 5 |
| Periods till callable: | 10 |
\begin{tabular}{l|c|c|c|} \hline A & A \\ 42 & d. What is the bond's yield to call? \end{tabular} Here we can again use the Rate function, but with data related to the call. \begin{tabular}{l|l|l|} \hline 45 & Peridodic YTC = & 3.16% Answer: \\ 46 & Annualized Nominal YTC = & 6.33% This is a nominal rate, not the effective rate. Nominal rates are generally quoted. \\ 48 & Answer: You would mutilpe the yield of 3.16% by 2 to give you 6.33% \end{tabular} The YTC is lower than the YTM because if the bond is called, the buyer will lose the difference between the call price and the current price in just 4 years, and that loss will offset much of the interest imcome. Note too that the bond is likely to be called and replaced, hence that the YTC will probably be earned. NOW ANSWER THE FOLLOWING NEW QUESTIONS: e. How would the price of the bond be affected by changing the going market interest rate? (Hint: Conduct a sensitivity analysis of price to changes in the going market interest rate for the bond. Assume that the bond will be called if and only if the going rate of interest falls below the coupon rate. That is an oversimplification, but assume it anyway for purposes of 8 this problem.) \begin{tabular}{l|l|l|} \hline 69 & Nominal market rate, r: & 8% \\ 61 & Value of bond if it's not called: & $1,000.00 \\ 62 & Value of bond if it's called: & $1,027.02 \end{tabular} The bond would not be called unless r7/1/2019, pays interest semiannually (January 1 and July 1), and sells for $1,100. Use your spreadsheet to find the bond's yield. Refer to this chapter's Tool Kit for information about how to use Excel's bond valuation functions. The model finds the price of a bond, but the procedures for finding the yield are similar. Begin by setting up the input data as shown below: Yield to Maturity: Yield function 10.34\% Hint: Use the Yield function.For dates, either refer to cells D122 and D123, or enter the date in quotes, such as "10/25/2014". \begin{tabular}{r|r|r|} \hline Basic info: & Addl CALL Details \\ \hline 10/25/19 & 7/1/24 Call date \\ 7/1/29 & & \\ 12% & & \\ 110 & 104 Call price \\ 100 & & \\ 2 & \end{tabular} To find the yield to call, use the YIELD function, but with the call price rather than par value as the redemption Yield to call: 9.96% Yield function You could also use Excel's "Price" function to find the value of a bond between interest payment dates. \begin{tabular}{l|c|c|c|} \hline A & A \\ 42 & d. What is the bond's yield to call? \end{tabular} Here we can again use the Rate function, but with data related to the call. \begin{tabular}{l|l|l|} \hline 45 & Peridodic YTC = & 3.16% Answer: \\ 46 & Annualized Nominal YTC = & 6.33% This is a nominal rate, not the effective rate. Nominal rates are generally quoted. \\ 48 & Answer: You would mutilpe the yield of 3.16% by 2 to give you 6.33% \end{tabular} The YTC is lower than the YTM because if the bond is called, the buyer will lose the difference between the call price and the current price in just 4 years, and that loss will offset much of the interest imcome. Note too that the bond is likely to be called and replaced, hence that the YTC will probably be earned. NOW ANSWER THE FOLLOWING NEW QUESTIONS: e. How would the price of the bond be affected by changing the going market interest rate? (Hint: Conduct a sensitivity analysis of price to changes in the going market interest rate for the bond. Assume that the bond will be called if and only if the going rate of interest falls below the coupon rate. That is an oversimplification, but assume it anyway for purposes of 8 this problem.) \begin{tabular}{l|l|l|} \hline 69 & Nominal market rate, r: & 8% \\ 61 & Value of bond if it's not called: & $1,000.00 \\ 62 & Value of bond if it's called: & $1,027.02 \end{tabular} The bond would not be called unless r7/1/2019, pays interest semiannually (January 1 and July 1), and sells for $1,100. Use your spreadsheet to find the bond's yield. Refer to this chapter's Tool Kit for information about how to use Excel's bond valuation functions. The model finds the price of a bond, but the procedures for finding the yield are similar. Begin by setting up the input data as shown below: Yield to Maturity: Yield function 10.34\% Hint: Use the Yield function.For dates, either refer to cells D122 and D123, or enter the date in quotes, such as "10/25/2014". \begin{tabular}{r|r|r|} \hline Basic info: & Addl CALL Details \\ \hline 10/25/19 & 7/1/24 Call date \\ 7/1/29 & & \\ 12% & & \\ 110 & 104 Call price \\ 100 & & \\ 2 & \end{tabular} To find the yield to call, use the YIELD function, but with the call price rather than par value as the redemption Yield to call: 9.96% Yield function You could also use Excel's "Price" function to find the value of a bond between interest payment dates
