HW
1)
BondValuation
Valuationand
andBond
BondYields
Yields
Bond
Bond
coupon
rate
(7%)
is less
than
the the
going
interest
Bond AA isis selling
selling atataadiscount
discountbecause
becauseitsits
coupon
rate
(7%)
is less
than
going
interest
rate
(YTM
=
9%).
rate (YTM = 9%).
rate
(9%)
is equal
to the
going
interest
raterate
(YTM
Bond BB isis selling
selling
atpar
parbecause
because
itscoupon
coupon
rate
(9%)
is equal
to the
going
interest
(YTM
Ch7Bond
Bond at
Valuation
andits
Bond
Yields
=
9%).
= 9%).
Bond
rate
(11%)
is greater
thanthan
the the
going
Bond CC isis selling
selling atat aapremium
premiumbecause
becauseitsitscoupon
coupon
rate
(11%)
is greater
going
interest
rate
(YTM
=
9%).
interest rate (YTM = 9%).
2)
Current price
bond:
at t=0of
aseach
follows:
2) 1. Valuation
Current price
of
each
bond:
Basic Input Data:
Basic Input Data:
Years to maturity:
Years to maturity:
Periods per year:
Periods per year:
Periods to maturity:
Periods rate:
to maturity:
Coupon
Coupon
rate:
Par
value:
Par value:
Periodic
payment:
Periodic
payment:
Yield
to maturity:
Yield to maturity:
VB0 =
VB0 =
3)
3)
Bond A
Bond B
Bond C
Bond A
Bond B
Bond C
12
12
12
12
12
12
1
1
1
1
1
1
12
12
12
7%12
9%12
11% 12
7%
9%
11%
$1,000
$1,000
$1,000
$1,000
$1,000
$1,000
$70
$90
$110
$70
$90
$110
9%
9%
9%
9%
9%
9%
$856.79
$1,000.00
$1,143.21
$856.79
$1,000.00
$1,143.21
The following table summarizes the inputs for TVM variables for the calculation of the
expected price in 1 year (VB1). It also includes the expected capital gains yield and expected
The following table summarizes the inputs for TVM variables for the calculation of the
total return of each bond for year 1:
expected price in 1 year (VB1). It also includes the expected capital gains yield and expected
2. Valuation
at t=1:
total return
of each bond for year 1:
Basic Input Data:
Years
to maturity:
Basic Input
Data:
Periods per year:
Years to maturity:
Periods to maturity:
Periods per year:
Coupon rate:
Periods
to maturity:
Par
value:
Coupon payment:
rate:
Periodic
Par
value:
Yield to maturity:
Periodic payment:
Yield
to maturity:
V
B1 =
Bond A
Bond 11
A
1
11
11
1
7%
$1,00011
7%
$70
$1,000
9%
$70
9%
$863.90
Bond B
Bond C
Bond 11
B
1
11
11
1
9%
$1,00011
9%
$90
$1,000
9%
Bond 11
C
$1,000.00
0.00%
$1,136.10
-0.62%
1
11
11
1
11%
$1,000 11
11%
$110
$1,000
9%
$90
$110
$1,000.009% $1,136.10 9%
VB1 = CG Yield =
Expected
$863.90
0.83%
ExpectedTotal
CG Yield
= =
Expected
Return
0.83%
9.00%
0.00%
9.00%
-0.62%
9.00%
9.00%
9.00%
9.00%
Expected Total Return =
1
1
1
4)
The following table summarizes the expect price of each bond in 2 years, and the expected
yield,
expected
capital
gains yield, and total return of each bond in year 2.
3.interest
Valuation
at t=2
(highlighted
in yellow):
Bond A
Bond B
Bond C
N
PMT
FV
YTM
Value
10
70
1000
9
10
90
1000
9
10
110
1000
9
871.65
1000
1128.4
Expected Interest Yield
8.10%
9.00%
9.68%
Expected CGY
0.90%
0.00%
-0.68%
9%
9%
9%
Expected Total Return
4. No calculation is needed for Q4: total return=YTM
5. No calculation is needed for Q5:
o
Bond C price drops while Bond A price increases; therefore CGYa>CGYc
6. IY=INT/P1
o
E.g. IY2 for Bond A=70/863.9=8.10% (note: reference to $871.65 will lead to incorrect conclusion on
IY as 8.03%)
o
You can conclude with abstract thinking: since YTM is the same and CGYA >CGYc, therefore, IYA<IYc.
2