A 20-year, 6% quarterly coupon bond with a par value of $10,000 may be called in 5 years at a call price of $10,200. The bond sells for $10.500. (Assume that the bond has just been issued.) Basic Input Data: Years to maturity:
A 20-year, 6% quarterly coupon bond with a par value of $10,000 may be called in 5 years at a call price of $10,200. The bond sells for $10.500. (Assume that the bond has just been issued.) Basic Input Data: Years to maturity:
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:9
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11 Periods per year:
12 Periods to maturity:
13 Coupon rate:
14 Par value:
15 Periodic payment
16 Current price
17 Call price:
18 Years till callable:
19 Periods till callable:
Paste
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Basic Input Data:
Years to maturity:
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6 A 20-year, 6% quarterly coupon bond with a par value of $10,000 may be called in 5 years at a call price of $10,200. The bond
7 sells for $10.500. (Assume that the bond has just been issued.).
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21 a. What is the bond's yield to maturity?
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27 b. What is the bond's current yield?
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34 c. What is the bond's capital gain or loss yield?
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40 Note that this is an economic loss, not a loss for tax purposes.
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42 d. What is the bond's yield to call?
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B
Cap. Gain/loss yield =
Cap. Gain/loss yield =
Cap. Gain/loss yield =
Arial
Current yield =
Current yield
Current yield =
BIU E
Rate, r
✓
53 NOW ANSWER THE FOLLOWING NEW QUESTIONS:
54
Ready
▸
Peridodic YTM=
Annualized Nominal YTM
0%
1%
3%
Š
fix
Peridodic YTC =
Annualized Nominal YTC
D
44 Here we can again use the Rate function, but with data related to the call.
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47
This is a nominal rate, not the effective rate. Nominal rates are generally quoted.
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49 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
50 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,
51 hence that the YTC will probably be earned.
52
Value of Bond If:
Not called
$0.00
Called
$0.00
1
55 e. How would the price of the bond be affected by changing the going market interest rate? Assume Norminal Market rate
56 is 6%. (Hint: Conduct a sensitivity analysis of price to changes in the going market interest rate for the bond. Assume that
57 the bond will be called if and only if the going rate of interest falls below the coupon rate. That is an oversimplification, but
58 assume it anyway for purposes of this problem.)
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60 Nominal market rate, r
61 Value of bond if it's not called:
62 Value of bond if it's called:
63
Build a Model
64 We can use the two valuation formulas to find values under different r's, in a 2-output data table, and then use an IF
65 statement to determine which value is appropriate:
>
0%
10
V
Actual value,
considering
call likehood:
+
Accessibility: Investigate
A A
A
F
|||
Hint: Write formula in words.
Hint: Cell formulas should refer to Input Section
(Answer)
Hint: Write formula in words.
Hint: Cell formulas should refer to Input Section
(Answer)
Hint: This is a nominal rate, not the effective rate. Nominal rates are generally quoted.
I
The bond would not be called unless r<coupon.
81
K
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