Build a Model Solution 11/26/2018
Chapter: 5
Problem: 24
Basic Input Data:
Years to maturity:
20
Periods per year:
2
a. What is the bond’s yield to maturity?
Peridodic YTM = 3.53%
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.
Peridodic YTC = 3.16%
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.)
5
NOW ANSWER THE FOLLOWING NEW QUESTIONS:
Nominal market rate, r: 8%
We can use the two valuation formulas to find values under different r’s, in a 2-output data table, and then use an IF
statement to determine which value is appropriate:
Actual value,
Not called Called considering
Rate, r $1,000.00 $1,027.02 call likehood:
0% $2,600.00 $1,440.00 $1,440.00
2% $1,985.04 $1,320.35 $1,320.35
4% $1,547.11 $1,212.47 $1,212.47
6% $1,231.15 $1,115.07 $1,115.07
Basic info:
Yield to Maturity: 10.34%
Yield to call: 9.96%
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.)
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:
Value of Bond If:
f. Now assume the date is 10/25/2019. Assume further that a 12%, 10-year bond was issued on 7/1/2019, pays
interest semiannually (January 1 and July 1), and sells for $1,100. Use your spreadsheet to find the bond’s yield.
Hint: Use the Yield function.For dates, either refer to cells D122 and D123, or enter
the date in quotes, such as “10/25/2014”.
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.