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    Chapter 5. Ch05 P24 Build A Model

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    Matúš Gašparovič
    The document provides sample input data and calculations for a 20-year bond with a par value of $1,000 that can be called in 5 years at $1,040. It then calculates: 1) The bond's yield to maturity is 7.06% and current yield is 7.27%, so the capital gain/loss yield is -0.21%. 2) The bond's yield to call is 6.33%, which is lower than the YTM since calling results in a loss of the difference between the current and call prices over just 4 years. 3) The bond's price would be affected by changing market interest rates, with the price decreasing as rates rise above the coupon

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    Chapter 5. Ch05 P24 Build A Model

    Uploaded by

    Matúš Gašparovič
    17 views5 pages
    The document provides sample input data and calculations for a 20-year bond with a par value of $1,000 that can be called in 5 years at $1,040. It then calculates: 1) The bond's yield to maturity is 7.06% and current yield is 7.27%, so the capital gain/loss yield is -0.21%. 2) The bond's yield to call is 6.33%, which is lower than the YTM since calling results in a loss of the difference between the current and call prices over just 4 years. 3) The bond's price would be affected by changing market interest rates, with the price decreasing as rates rise above the coupon

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    The document provides sample input data and calculations for a 20-year bond with a par value of $1,000 that can be called in 5 years at $1,040. It then calculates: 1) The bond's yield to maturity is 7.06% and current yield is 7.27%, so the capital gain/loss yield is -0.21%. 2) The bond's yield to call is 6.33%, which is lower than the YTM since calling results in a loss of the difference between the current and call prices over just 4 years. 3) The bond's price would be affected by changing market interest rates, with the price decreasing as rates rise above the coupon

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    17 views5 pages

    Chapter 5. Ch05 P24 Build A Model

    Uploaded by

    Matúš Gašparovič
    The document provides sample input data and calculations for a 20-year bond with a par value of $1,000 that can be called in 5 years at $1,040. It then calculates: 1) The bond's yield to maturity is 7.06% and current yield is 7.27%, so the capital gain/loss yield is -0.21%. 2) The bond's yield to call is 6.33%, which is lower than the YTM since calling results in a loss of the difference between the current and call prices over just 4 years. 3) The bond's price would be affected by changing market interest rates, with the price decreasing as rates rise above the coupon

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    of 5

    Chapter 5.

    Ch05 P24 Build a Model

    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 just been issued.)

    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

    a. What is the bond's yield to maturity?

    Peridodic YTM = 3.53%


    Annualized Nominal YTM = 7.06% Hint: This is a nominal rate, not the effective rate. Nominal rates are g

    b. What is the bond's current yield?

    Current yield = Annual Coupon Price Hint: Write formula in words.


    Current yield = $80 / $1,100 Hint: Cell formulas should refer to Input Section
    Current yield = 7.27% (Answer)

    c. What is the bond's capital gain or loss yield?

    Cap. Gain/loss yield =


    Annualized Nominal YTM - Current yield Hint: Write formula in words.
    Cap. Gain/loss yield = 7.06% - 7.27% Hint: Cell formulas should refer to Input Section
    Cap. Gain/loss yield = -0.21% (Answer)

    Note that this is an economic loss, not a loss for tax purposes.

    d. What is the bond's yield to call?

    Here we can again use the Rate function, but with data related to the call.

    Peridodic YTC = 3.16%


    Annualized Nominal YTC = 6.33% This is a nominal rate, not the effective rate. Nominal rates are generall

    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.
    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 this problem.)

    Nominal market rate, r: 8%


    Value of bond if it's not called: $1,000.00
    Value of bond if it's called: $1,027.02 The bond would not be called unless r<coupon.

    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
    statement to determine which value is appropriate:

    Value of Bond If: Actual value,


    Not called Called considering
    Rate, r $1,000.00 $1,027.02 call likehood:
    0% $1,440.00
    2%
    4%
    6%
    8%
    10%
    12%
    14%
    16%

    f. Now assume the date is 10/25/2010. Assume further that a 12%, 10-year bond was issued on 7/1/2010, 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:

    Basic info:
    Settlement (today) 10/25/2010
    Maturity 7/1/2020
    Coupon rate 12%
    Current price (% of par) 110
    Redemption (% of par value) 100
    Frequency (for semiannual) 2
    Basis (360 or 365 day year) 360

    Yield to Maturity: 10.34% Hint: Use the Yield function.For dates, either refer to cells D122 and D123, or enter the
    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: 10.90%

    You could also use Excel's "Price" function to find the value of a bond between interest payment dates.

    Price -> $ 110.00


    ce of $1,040. The bond sells

    ctive rate. Nominal rates are generally quoted.

    d refer to Input Section

    d refer to Input Section

    te. Nominal rates are generally quoted.

    call price and the current price


    led and replaced, hence that
    call price and the current price
    led and replaced, hence that

    duct a sensitivity analysis of


    nd only if the going rate of
    f this problem.)

    0, pays interest
    d.

    finds the price of a bond, but

    D122 and D123, or enter the date in quotes, such as "10/25/2010".

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