Build a Model Solution 11/26/2018
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?
Peridodic YTM = 3.53%
Annualized Nominal YTM = 7.06% Hint: This is a nominal rate, not the effective rate. Nominal rates are generally quoted.
b. What is the bond's current yield?
Current yield = Ann. Coupon / Price Hint: Write formula in words.
Current yield = $80 /$1,100 Hint: Cell formulas should refer to Input Section
Current yield = 7.27% (Answer)
c. What is the bond's capital gain or loss yield?
Cap. Gain/loss yield = YTM -
Current yield
Hint: Write formula in words.
Cap. Gain/loss yield = 7.06% -7.27% Hint: Cell formulas should refer to Input Section
Cap. Gain/loss yield = -0.21% (Answer)
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%
Annualized Nominal YTC = 6.33% This is a nominal rate, not the effective rate. Nominal rates are generally quoted.
NOW ANSWER THE FOLLOWING NEW QUESTIONS:
The YTC is lower than the YTM because if the bond is called, the buyer will lose the difference between the call price and
the current price in just 4 years, and that loss will offset much of the interest imcome. Note too that the bond is likely to be
called and replaced, hence that the YTC will probably be earned.
e. How would the price of the bond be affected by changing the going market interest rate? (Hint: Conduct a
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.)
f. Now assume the date is 10/25/2019. Assume further that a 12%, 10-year bond was issued on 7/1/2019, pays