Solution 12/7/2012
Chapter: 5
Problem: 24
Basic Input Data:
Years to maturity:
20
Periods per year:
2
Periods to maturity:
40
Coupon rate:
8%
Par value:
$1,000
Periodic payment:
$40
Current price
$1,100
Call price:
$1,040
Years till callable:
5
Periods till callable: 10
a. What is the bond’s yield to maturity?
b. What is the bond’s current yield?
c. What is the bond’s capital gain or loss yield?
Cap. Gain/loss yield = YTM –
Current yield
Hint: Write formula in words.
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.
NOW ANSWER THE FOLLOWING NEW QUESTIONS:
Nominal market rate, r: 8%
Value of bond if it’s not called: $1,000.00
Value of bond if it’s called: $1,027.02 The bond would not be called unless r<coupon.
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.)
A 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 info:
Settlement (today)
10/25/2014
To find the yield to call, use the YIELD function, but with the call price rather than par value as the
redemption
Refer to this chapter’s Tool Kit for information about how to use Excel’s bond valuation functions. The model finds the
price of a bond, but the procedures for finding the yield are similar. Begin by setting up the input data as shown below:
f. Now assume the date is 10/25/2014. Assume further that a 12%, 10-year bond was issued on 7/1/2014, pays
interest semiannually (January 1 and July 1), and sells for $1,100. Use your spreadsheet to find the bond’s yield.