Fixed Income Valuation

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Harvard Business School 9-298-080
December 30, 1997
Fixed Income Valuation
1. On December 20, 1994 the Nippon Telegraph & Telephone Corporation (NTT) issued
¥1 billion of 10-year debentures due December 20, 2004. The debentures carried a 4 3/4%
coupon. They were priced at par, that is, they cost the investor ¥100 per ¥100 of face value.
The entire amount of borrowed principal would be repaid at maturity. Interest would be
paid annually upon the anniversary date of the issuance (i.e., on December 20th of each
year). The debentures carried a AAA credit rating.
A. What was the yield to maturity of NTT’s debentures at the time of issuance? What would it
have been if the bonds were priced at 99 instead of 100 (i.e., at 99% of face value)? at 101
instead of 100?
B. By 1996 yields on AAA yen debt maturing in 8 years had dropped to 3.00%. Given this
yield to maturity, at what price should the NTT debentures have been selling?
2. Ms. Alumm is the portfolio manager for a large insurance company. She is considering
investing $1 million to purchase some bonds of Patriot Enterprises, Inc.
All of Patriot’s bonds have market prices that imply a yield to maturity of 8% “bond
equivalent yield” (that is 4% every 6-month period).1 Each Patriot bond is described here,
based on a $1,000 face value (par value), which is the promised payment at maturity.
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