Bond Valuation (1) 331a70

PROBLEMS ON BOND VALUATION 1 Sky Enterprises has bonds on the market making annual payments with and selling for $1045. At this price, the bond yields 7.5 per cent .What ANS PV FV RATE NPER COUPON PMT COUPON RATE

2

1045 1000 0.075 13 $80.54 8.053788883 %

Grohl Co issued 11 year bonds a year ago at a coupon rate semiannual payments. If the YTM on these bonds is 7.4 perce SOLUTION settlement maturity rate yield redemption frequency

1/1/2010 1/1/2020 0.069 0.074 100 2 96.51034873 % of Par

THE PRICE OF THE BOND IS $965.10

3 Ngata Corp issued 12 year bonds 2 year ago at a coupon rate of 8.4 per semiannual payments. If the bonds currently sell for 105 percent of par 0.076747 solution

NGATA CORP settlement 1/1/2000 maturity 1/1/2010 rate 0.084 yield ??? PRICE 105 redemption 100 frequency 2 0.076747397 THE YIELD TO MATURITY IS 7.68%

4

Ashes Divide Corp has bonds on the market with 14.5 years to and a current price of $924.The bonds make semiannual paym be on these bonds? PV FV NPER RATE COUPON

924 1000 14.5 0.068 PMT

$59.59

COUPON RATE

5.959364

5 Suppose the real rate is 3 per cent and the inflation expect to see on a Treasury bill? SOLUTION 5 NOMINAL RATE INTEREST (1+n)=(1+r)(1+i) n=(1+r)(1+i)-1 (1.03)(1.047)-1 0.07841

6 Bond X is a bond making annual payments YTM of 6 percent and has 13 years to maturity. Bond payments. This bond pays a 6percent coupon, has a maturity. If interest rates remain unchanged, what d one year from now? In three years in eight years ,in

6

BOND X

BOND

SETTEMENT DATE MATURITY DATE COUPON YTM REDEM

BOND X

FREQUENCY P0 P1 P3 P8 P12 P13

P0 P1 P3 P8 P12 P13

All else held equal, the over par value for a bond d from par value for a discount bond declines as maturity approaches This is called "pull to par". In both cases , the largest percentage pric

7 Both Bond Sam and Bond Dave have 9 per cent coupons, mak priced at par value. Bond Sam has 3 years to maturity ,where maturity .If the interest rates suddenly rise by 2 percent ,wha price of Bond Sam ? Bond Dave? If the rates were to suddenly would be the percentage change in the price of Bond Sam be your answers by graphing bond prices versus YTM. What doe interest rate risk of longer term bonds solution

Any bond that sells at par has a YTM equal to the coupon r on both bonds is the coupon rate , 9%. If the YTM suddenly BOND SAM SETTLEMENT DATE MATURITY DATE COUPON YIELD REDEMPTION FREQUENCY PRICE PERCENT CHANGE

IF THE YTM SUDDENLY FALLS TO 7 PER CEN BOND SAM SETTLEMENT DATE MATURITY DATE COUPON YIELD REDEMPTION FREQUENCY PRICE PERCENT CHANGE

ALL ELSE THE SAME, THE LONGER THE MATURITY OF SENSITIVITY TO CHANGES IN INTEREST RATES

making annual payments with 13 years to maturity nd yields 7.5 per cent .What must be the coupon rate

a year ago at a coupon rate of 6.9 percent. The bonds make on these bonds is 7.4 percent, what is the current bond price?

96.5103487

o at a coupon rate of 8.4 percent. The bonds make ly sell for 105 percent of par value, what is the YTM?

0.0767474

he market with 14.5 years to maturity, a YTM of 6.8 per cent onds make semiannual payments. What must the coupon rate

Err:523

₹ 59.59

%

s 3 per cent and the inflation rate is 4.7 per cent. What rate would you sury bill? 0.07841

settlement da maturity 1 maturity 3 maturity 8 maturity 12 maturity 13 7.84%

nd making annual payments. The bond pays an 8 percent coupon, has a as 13 years to maturity. Bond Y is a discount bond making annual ys a 6percent coupon, has a YTM of 8 percent and also has 13 years to es remain unchanged, what do you expect the price of these bonds be hree years in eight years ,in 12 years in 13 years .Illustrate your answers by graphing bond prices

REMIUM BOND

1/1/2000 1/1/2013 0.08 0.06 100

1/1/2000 1/1/2012

1/1/2000 1/1/2010 0.06 0.08

1/1/2000 1/1/2005

1/1/2000 1/1/2001

1/1/2000 1/1/2000

1 117.705366 P0 116.767688 P1 114.720174 P3 108.424728 P8 101.886792 P12 100 P13 BONDX 1177.05366 1167.67688 1147.20174 1084.24728 1018.86792 1000

BOND Y 84.19244812 84.92784397 86.5798372 92.01457993 98.14814815 100 BOND Y 841.92 849.28 865.80 920.15 981.48 1000

par value for a bond declines as maturity approaches, and the discount clines as maturity approaches ses , the largest percentage price changes occur at the shortest maturity lengths

ave 9 per cent coupons, make semiannual payments and are s 3 years to maturity ,whereas Bond Dave has 20 years to ddenly rise by 2 percent ,what is the percentage change in the f the rates were to suddenly fall by 2 percent instead, what in the price of Bond Sam be then ?of Bond dave . Illustrate prices versus YTM. What does this problem tell you about the

has a YTM equal to the coupon rate . Both bonds sell at par, so the initial YTM on rate , 9%. If the YTM suddenly rises to 11 per cent BOND DAVE 1/1/2000 1/1/2003 0.09 0.11 100 2 95.0044697 950.044697 -4.99553031

1/1/2000 1/1/2020 0.09 0.11 100 2 83.95387531 839.5387531 -16.04612469

1/1/2000 1/1/2003 1/1/2020

UDDENLY FALLS TO 7 PER CENT BOND DAVE 1/1/2000 1/1/2003 0.09 0.07 100 2 105.328553 1053.28553 5.32855302

1/1/2000 1/1/2020 0.09 0.07 100 2 121.3550723 1213.550723 21.35507234

E LONGER THE MATURITY OF A BOND, THE GREATER IS ITS PRICE ES IN INTEREST RATES

x 1/1/2000 1/1/2001 1/1/2003 1/1/2008 1/1/2012 1/1/2013

101.8868 105.346 112.4196 116.7677 117.7054

y 98.14815 94.84581 88.50672 84.92784 84.19245

y graphing bond prices versus time to maturity.

0.09 0.09