1 Bond Valuation 2 3 Bond A Bond B Bond C 4 Years to maturity 12 12 12 5 Number of coupon payment per year 1 1 1 6 Coupon rate 10% 6% 14% 7 Par value $1,000 $1,000 $1,000 8 Yield to maturity 10% 10% 10% 9 10 b. Calculating the price of each of the three bonds 11 Bond A Bond B Bond C 12 VBO 13 14 c. Calculating the current yield for each of the three bonds 15 Bond A Bond B Bond C 16 Current yield 17 18 d. Calculating the price of each bond 1 year from now, the expected capital gains yield for each bond, 19 and the expected total return for each bond 20 Bond A Bond B Bond C 21 Years to maturity 11 11 11 22 23 V81 24 Expected CG Yield 25 Expected Total Retum 26 27 e. Mr. Clark is considering another bond, Bond D. 28 Years to maturity 9 29 Number of coupon payment per year 2 30 Coupon rate 8% 31 Par value $1,000 32 Coupon payment $40 33 Current price $1,150 34 Call price $1,040 35 Years until bond is callable 5 36 Formulas 37 (1) Calculating the bond's nominal yield to maturity #N/A 38 (2) Calculating the bond's nominal yield to call #N/A 39 40 f. Determining which of the bonds has the most price risk and which has the most reinvestment risk 41 Bond 1 Bond 2 Bond 3 Bond 4 Bond 5 40 f. Determining which of the bonds has the most price risk and which has the most reinvestment risk 41 Bond 1 Bond 2 Bond 3 Bond 4 Bond 5 42 Years to maturity 1 5 5 10 10 43 Number of coupon payment per year 1 1 1 44 Coupon rate 10% 10% 10% 45 Par value $1,000 $1,000 $1,000 $1,000 $1,000 46 47 Price at YTM = 10% 48 Price at YTM = 11% 49 % Price Change 50 51 g. Calculating the price of each bond (A, B, and C) at the end of each year until maturity, assuming interest rates remain c Years Remaining 52 Until Maturity Bond A Bond B Bond C 53 12 54 11 55 10 56 9 57 8 58 7 59 6 60 5 61 4 62 3 63 2 64 1 65 0 66 67 Creating a graph showing the time path of each bond's value Bond C Bond C 92 (1) Calculating the expected current yield for each bond in each year Years Remaining 93 Until Maturity Bond A Bond B 94 12 95 11 96 10 97 9 98 8 99 7 100 6 101 5 102 4 103 3 104 2 105 1 106 107 (2) Calculating the expected capital gains yield for each bond in each year Years Remaining 108 Until Maturity Bond A Bond B 109 12 110 11 111 10 112 9 113 8 114 7 115 6 116 5 117 4 118 3 119 2 120 1 121 122 (3) Calculating the total return for each bond in each year Years Remaining 123 Until Maturity Bond A Bond B 124 12 125 11 126 10 127 9 128 8 129 7 130 6 131 5 132 4 133 3 134 2 135 1 136 Bond C Excel Activity: Bond Valuation Clifford Clark is a recent retiree who is interested in investing some of his savings in corporate bonds. His financial planner has suggested the following bonds: Bond A has a 10% annual coupon, matures in 12 years, and has a $1,000 face value. Bond B has a 6% annual coupon, matures in 12 years, and has a $1,000 face value. Bond C has a 14% annual coupon, matures in 12 years, and has a $1,000 face value. Each bond has a yield to maturity of 10%. The data has been collected in the Microsoft Excel file below. Download the spreadsheet and perform the required analysis to answer the questions below. Do not round intermediate calculations. Use a minus sign to enter negative values, if any. If an answer is zero, enter "O". Download spreadsheet Bond Valuation-9673bf.xlsx a. Before calculating the prices of the bonds, indicate whether each bond is trading at a premium, at a discount, or at par. Bond A is selling at because its coupon rate is the going interest rate. Bond B is selling at because its coupon rate is the going interest rate. Bond C is selling at because its coupon rate is the going interest rate. b. Calculate the price of each of the three bonds. Round your answers to the nearest cent. Price (Bond A): $ Price (Bond B): $ c. Calculate the current yield for each of the three bonds. (Hint: The expected current yield is calculated as the annual interest divided by the price of the bond.) Round your answers to two decimal places. Current yield (Bond A): % Current yield (Bond B): % Current yield (Bond C): % d. If the yield to maturity for each bond remains at 10%, what will be the price of each bond 1 year from now? Round your answers to the nearest cent. Price (Bond A): $ Price (Bond B): $ Price (Bond C): $ What is the expected capital gains yield for each bond? What is the expected total return for each bond? Round your answers to two decimal places. Bond A Bond B Bond C % % % Expected capital gains yield Expected total return % % % e. Mr. Clark is considering another bond, Bond D. It has an 8% semiannual coupon and a $1,000 face value (i.e., it pays a $40 coupon every 6 months). Bond D is scheduled to mature in 9 years and has a price of $1,150. It is also callable in 5 years at a call price of $1,040. 1. What is the bond's nominal yield to maturity? Round your answer to two decimal places. % 2. What is the bond's nominal yield to call? Round your answer to two decimal places. % 3. If Mr. Clark were to purchase this bond, would he be more likely to receive the yield to maturity or yield to call? Explain your answer. Because the YTM is the YTC, Mr. Clark expect the bond to be called. Consequently, he would earn f. Explain briefly the difference between price risk and reinvestment risk. This risk of a decline in bond values due to an increase in interest rates is called The risk of an income decline due to a drop in interest rates is called Which of the following bonds has the most price risk? Which has the most reinvestment risk? A 1-year bond with a 10% annual coupon A 5-year bond with a 10% annual coupon A 5-year bond with a zero coupon A 10-year bond with a 10% annual coupon A 10-year bond with a zero coupon A has the most price risk. A has the most reinvestment risk. g. Calculate the price of each bond (A, B, and C) at the end of each year until maturity, assuming interest rates remain constant. Round your answers to the nearest cent. Years Remaining Until Maturity Bond A Bond B Bond C 12 11 10 $ $ $ $ $ $ $ $ 9 HA 8 $ 7 6 $ 5 $ $ 4 3 NW $ $ $ 2 1 ta ta 0 The correct graph is A. B. Time Paths of Bonds A, B, and C , Time Paths of Bonds A, B, and C $1,400 $1,400 $1,200 $1,200 $1,000 $1,000 $800 $800 Bond Value Bond Value $600 $600 $400 $400 $200 $200 SO 12 SO 12 9 Bond A Years Remaining Until Maturity Bond B Bond C Bond A A Years Remaining Until Maturity Bond B B Bond C C. D. Time Paths of Bonds A, B, and C Time Paths of Bonds A, B, and C $1,400 $1,400 $1,200 $1,200 $1,000 $1,000 $800 $800 Bond Value Bond V $600 $600 1. What is the expected current yield for each bond in each year? Round your answers to two decimal places. Years Remaining Until Maturity Bond A Bond B Bond C 12 % % % 11 % % % 10 % % % 9 % % % 8 % % % 7 % % % 6 % % % 5 % % % 4 % % % 3 % % % 2 % % % 1 % % % 2. What is the expected capital gains yield for each bond in each year? Round your answers to two decimal places. Years Remaining Until Maturity Bond A Bond B Bond C 12 % % % 11 % % % 10 % % % 9 % % % 8 % % % 7 % % % 6 % % % 5 % % % 0 + m N. 4 % % % 3 % % % 2 % % % 1 % % % 3. What is the total return for each bond in each year? Round your answers to two decimal places. Years Remaining Until Maturity Bond A Bond B Bond C 12 % % % 11 % % % 10 % % % 9 % % % 8 % % % 7 % % % 6 % % % 5 % % % 4 % % % 3 % % % 2 % % % 1 % % % 1 Bond Valuation 2 3 Bond A Bond B Bond C 4 Years to maturity 12 12 12 5 Number of coupon payment per year 1 1 1 6 Coupon rate 10% 6% 14% 7 Par value $1,000 $1,000 $1,000 8 Yield to maturity 10% 10% 10% 9 10 b. Calculating the price of each of the three bonds 11 Bond A Bond B Bond C 12 VBO 13 14 c. Calculating the current yield for each of the three bonds 15 Bond A Bond B Bond C 16 Current yield 17 18 d. Calculating the price of each bond 1 year from now, the expected capital gains yield for each bond, 19 and the expected total return for each bond 20 Bond A Bond B Bond C 21 Years to maturity 11 11 11 22 23 V81 24 Expected CG Yield 25 Expected Total Retum 26 27 e. Mr. Clark is considering another bond, Bond D. 28 Years to maturity 9 29 Number of coupon payment per year 2 30 Coupon rate 8% 31 Par value $1,000 32 Coupon payment $40 33 Current price $1,150 34 Call price $1,040 35 Years until bond is callable 5 36 Formulas 37 (1) Calculating the bond's nominal yield to maturity #N/A 38 (2) Calculating the bond's nominal yield to call #N/A 39 40 f. Determining which of the bonds has the most price risk and which has the most reinvestment risk 41 Bond 1 Bond 2 Bond 3 Bond 4 Bond 5 40 f. Determining which of the bonds has the most price risk and which has the most reinvestment risk 41 Bond 1 Bond 2 Bond 3 Bond 4 Bond 5 42 Years to maturity 1 5 5 10 10 43 Number of coupon payment per year 1 1 1 44 Coupon rate 10% 10% 10% 45 Par value $1,000 $1,000 $1,000 $1,000 $1,000 46 47 Price at YTM = 10% 48 Price at YTM = 11% 49 % Price Change 50 51 g. Calculating the price of each bond (A, B, and C) at the end of each year until maturity, assuming interest rates remain c Years Remaining 52 Until Maturity Bond A Bond B Bond C 53 12 54 11 55 10 56 9 57 8 58 7 59 6 60 5 61 4 62 3 63 2 64 1 65 0 66 67 Creating a graph showing the time path of each bond's value Bond C Bond C 92 (1) Calculating the expected current yield for each bond in each year Years Remaining 93 Until Maturity Bond A Bond B 94 12 95 11 96 10 97 9 98 8 99 7 100 6 101 5 102 4 103 3 104 2 105 1 106 107 (2) Calculating the expected capital gains yield for each bond in each year Years Remaining 108 Until Maturity Bond A Bond B 109 12 110 11 111 10 112 9 113 8 114 7 115 6 116 5 117 4 118 3 119 2 120 1 121 122 (3) Calculating the total return for each bond in each year Years Remaining 123 Until Maturity Bond A Bond B 124 12 125 11 126 10 127 9 128 8 129 7 130 6 131 5 132 4 133 3 134 2 135 1 136 Bond C Excel Activity: Bond Valuation Clifford Clark is a recent retiree who is interested in investing some of his savings in corporate bonds. His financial planner has suggested the following bonds: Bond A has a 10% annual coupon, matures in 12 years, and has a $1,000 face value. Bond B has a 6% annual coupon, matures in 12 years, and has a $1,000 face value. Bond C has a 14% annual coupon, matures in 12 years, and has a $1,000 face value. Each bond has a yield to maturity of 10%. The data has been collected in the Microsoft Excel file below. Download the spreadsheet and perform the required analysis to answer the questions below. Do not round intermediate calculations. Use a minus sign to enter negative values, if any. If an answer is zero, enter "O". Download spreadsheet Bond Valuation-9673bf.xlsx a. Before calculating the prices of the bonds, indicate whether each bond is trading at a premium, at a discount, or at par. Bond A is selling at because its coupon rate is the going interest rate. Bond B is selling at because its coupon rate is the going interest rate. Bond C is selling at because its coupon rate is the going interest rate. b. Calculate the price of each of the three bonds. Round your answers to the nearest cent. Price (Bond A): $ Price (Bond B): $ c. Calculate the current yield for each of the three bonds. (Hint: The expected current yield is calculated as the annual interest divided by the price of the bond.) Round your answers to two decimal places. Current yield (Bond A): % Current yield (Bond B): % Current yield (Bond C): % d. If the yield to maturity for each bond remains at 10%, what will be the price of each bond 1 year from now? Round your answers to the nearest cent. Price (Bond A): $ Price (Bond B): $ Price (Bond C): $ What is the expected capital gains yield for each bond? What is the expected total return for each bond? Round your answers to two decimal places. Bond A Bond B Bond C % % % Expected capital gains yield Expected total return % % % e. Mr. Clark is considering another bond, Bond D. It has an 8% semiannual coupon and a $1,000 face value (i.e., it pays a $40 coupon every 6 months). Bond D is scheduled to mature in 9 years and has a price of $1,150. It is also callable in 5 years at a call price of $1,040. 1. What is the bond's nominal yield to maturity? Round your answer to two decimal places. % 2. What is the bond's nominal yield to call? Round your answer to two decimal places. % 3. If Mr. Clark were to purchase this bond, would he be more likely to receive the yield to maturity or yield to call? Explain your answer. Because the YTM is the YTC, Mr. Clark expect the bond to be called. Consequently, he would earn f. Explain briefly the difference between price risk and reinvestment risk. This risk of a decline in bond values due to an increase in interest rates is called The risk of an income decline due to a drop in interest rates is called Which of the following bonds has the most price risk? Which has the most reinvestment risk? A 1-year bond with a 10% annual coupon A 5-year bond with a 10% annual coupon A 5-year bond with a zero coupon A 10-year bond with a 10% annual coupon A 10-year bond with a zero coupon A has the most price risk. A has the most reinvestment risk. g. Calculate the price of each bond (A, B, and C) at the end of each year until maturity, assuming interest rates remain constant. Round your answers to the nearest cent. Years Remaining Until Maturity Bond A Bond B Bond C 12 11 10 $ $ $ $ $ $ $ $ 9 HA 8 $ 7 6 $ 5 $ $ 4 3 NW $ $ $ 2 1 ta ta 0 The correct graph is A. B. Time Paths of Bonds A, B, and C , Time Paths of Bonds A, B, and C $1,400 $1,400 $1,200 $1,200 $1,000 $1,000 $800 $800 Bond Value Bond Value $600 $600 $400 $400 $200 $200 SO 12 SO 12 9 Bond A Years Remaining Until Maturity Bond B Bond C Bond A A Years Remaining Until Maturity Bond B B Bond C C. D. Time Paths of Bonds A, B, and C Time Paths of Bonds A, B, and C $1,400 $1,400 $1,200 $1,200 $1,000 $1,000 $800 $800 Bond Value Bond V $600 $600 1. What is the expected current yield for each bond in each year? Round your answers to two decimal places. Years Remaining Until Maturity Bond A Bond B Bond C 12 % % % 11 % % % 10 % % % 9 % % % 8 % % % 7 % % % 6 % % % 5 % % % 4 % % % 3 % % % 2 % % % 1 % % % 2. What is the expected capital gains yield for each bond in each year? Round your answers to two decimal places. Years Remaining Until Maturity Bond A Bond B Bond C 12 % % % 11 % % % 10 % % % 9 % % % 8 % % % 7 % % % 6 % % % 5 % % % 0 + m N. 4 % % % 3 % % % 2 % % % 1 % % % 3. What is the total return for each bond in each year? Round your answers to two decimal places. Years Remaining Until Maturity Bond A Bond B Bond C 12 % % % 11 % % % 10 % % % 9 % % % 8 % % % 7 % % % 6 % % % 5 % % % 4 % % % 3 % % % 2 % % % 1 % % %