Chapter 5. Solution to Ch05 P24 Build a Model Basic Input Data: Years to maturity: 20 Periods per year: 2 Periods to maturit 40 Coupon rate: 8% Par value: $1,000 Periodic payment: $40 Current price $1,100 Call price: $1,040 Years till callabl 5 Periods till calla 10 a. What is the bond's yield to maturity? Peridodic YTM = 3.53% Annualized Nominal YTM = 7.06% b. What is the bond's current yield? Current yield = Ann. Coupon / Price Hint: Write formula in words Current yield = $80 / $1,100 Hint: Cell formulas should r Current yield = 7.27% (Answer) c. What is the bond's capital gain or loss yield? Gain/loss yield = YTM - Current yield Hint: Write formula in words Gain/loss yield = 7.06% - 7.27% Hint: Cell formulas should r Gain/loss yield = -0.21% (Answer) 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% A 20-year, 8% semiannual coupon bond with a par value of $1,000 may be called in call price of $1,040. The bond sells for $1,100. (Assume that the bond has just b Hint: This is a nominal rate, not the e Note that this is an economic loss, not a loss for tax purposes. This is a nominal rate, not the effective difference between the call price and the current price in just 4 years, and that offset much of the interest imcome. Note too that the bond is likely to be calle
Build a Model Solution4/11/10Chapter 5. Solution to Ch05 P24
Build a ModelA 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:20Periods per
year:2Periods to maturity:40Coupon rate:8%Par value:$1,000Periodic
payment:$40Current price$1,100Call price:$1,040Years till
callable:5Periods till callable:10a. 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
generally quoted.b. What is the bond's current yield?Current yield
=Ann. Coupon /PriceHint: Write formula in words.Current yield
=$80/$1,100Hint: Cell formulas should refer to Input SectionCurrent
yield =7.27%(Answer)c. What is the bond's capital gain or loss
yield?Cap. Gain/loss yield =YTM-Current yieldHint: Write formula in
words.Cap. Gain/loss yield =7.06%-7.27%Hint: Cell formulas should
refer to Input SectionCap. 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 generally quoted.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:$1,000.00Value of bond if it's called:$1,027.02The bond
would not be called unless r
