Acst6003-Week6 Tutorial

Tutorial & Computer Lab – Week 6
Parrino et al. Chapter 8
Instructions
• Spend the first 50 min on tutorial questions

• Spend the remaining 40 min on working through the Computer Lab Exercises at
the end of this document (students may work in groups of up to 3 people)
Note: Tutors may not be able to cover all tutorial questions/excel exercises during the
tutorial time. Students are expected to complete all remaining exercises as part of their own
self-study.
1. Explain what an efficient capital market is and why ‘market efficiency’ is important
to financial managers. [Come back to this question in week 8]
2. Distinguish between a bond’s coupon rate, yield to maturity and effective annual yield,
and be able to calculate their values.
3. Describe the factors that determine the level and shape of the yield curve.
4. Explain why investors in bonds are subject to interest rate risk and why it is important
to understand the bond theorems.
5. Discuss the concept of default risk and know how to calculate a default risk premium.
6. Billabong International Ltd issued a 5-year bond 1 year ago with a coupon of 8 per cent
and a face value of $1000. The bond pays interest semi-annually. If the yield to
maturity on this bond is 9 per cent, what is the price of the bond?
7. Westpac Banking Corporation has a 3-year bond outstanding that pays a 7.25 per cent
coupon and is currently priced at $913.88. What is the yield to maturity of this bond?
Assume annual coupon payments and a face value of $1000.
8. Highland Corporation Pty Ltd, an Australian company, has a 5-year bond whose yield
to maturity is 6.5 per cent. The bond has no coupon payments. The bond has a face
value of $1000. What is the price of this zero coupon bond?
9. Bond price: Alex Simmonds just received a gift from her grandfather. She plans to
invest in a 5-year bond issued by Nucorp Pty Ltd that pays annual coupons of 4.81 per
cent. If the current market rate is 9.11 per cent, what is the maximum amount Alex
should be willing to pay for this bond? Assume it has a face value of $1000.
10. Zero coupon bonds: 10-year zero coupon bonds issued by the Queensland Treasury
have a face value of $1000 and interest is compounded semi-annually. If similar bonds
in the market yield 11.32 per cent, what is the value of these bonds?
11. Realised yield: Four years ago, Lisa Hampson bought 6-year, 11.63 per cent coupon
bonds issued by Flight Centre Ltd for $947.68. If she sells these bonds at the current
price of $903.47, what is the realised yield on the bonds? Assume annual coupons on
similar coupon-paying bonds and a face value of $1000.
12. Probiotec Ltd has 7-year bonds outstanding. The bonds pay a coupon of 8.375 per cent
semiannually and are currently worth $1063.49. The bonds can be called in 3 years at
a price of $1075. The bond has a face value of $1000.
a. What is the yield to maturity on the bond?
b. What is the effective annual yield?
c. What is the realised yield on the bonds if they are called?
d. If you plan to invest in this bond today, what is the expected yield on the
investment? Explain.
Computer Lab Exercises
1. Redo Demonstration Problem 6.1 (p.199 and p. 200) in Excel to learn how to use
=PRICE (sd, md, rate, yld, redemption, frequency, [basis]) formula to price a bond. Make sure
you can explain how PRICE formula works.
2. Price the bond given in Question 1 above using the PV(rate, nper, pmt, [fv], [type]) formula
in Excel. See https://exceljet.net/formula/bond-valuation-example for details regarding PV
formula. Make sure you can explain how PV formula works.
3. Use both PRICE and PV formulas in Excel to price the bond in Demonstration Problem 6.2
(p.201) of textbook.
4. Consider a 30-year bond with a face value of $1000 and an 8 percent coupon rate (paid
semi-annually) and the current price of $800.
Use RATE(nper, pmt, pv, [fv], [type], [guess]) function in Excel (see picture below) to
compute bond’s
a. Annual Yield to Maturity

b. Effective Annual Yield (EAY)
Make sure you can explain how RATE formula works.
5. You buy a bond for 3-year 6% coupon bond for $980. What is the realised yield on
the bond if the coupon payments are semi-annual and you sell the bond after 2
years. (hint: use RATE formula in Excel)

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Tutorial & Computer Lab – Week 6

Parrino et al. Chapter 8

• Spend the first 50 min on tutorial questions

a. Annual Yield to Maturity

Make sure you can explain how RATE formula works.

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