Chapter 5.

Ch05 P24 Build a Model

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 f
Basic Input Data:
Years to maturity:
Periods per year:
Periods to maturity:
Coupon rate:
Par value:
Periodic payment:
Current price
Call price:
Years till callable:
Periods till callable:

20
2
40
8%
$1,000
$40
$1,100
$1,040
5
10

a. What is the bond's yield to maturity?

Peridodic YTM =
Annualized Nominal YTM =

3.53%
7.06%

b. What is the bond's current yield?

Current yield = Annual Interest
Current yield =
$80
Current yield =
7.27%

/
/

c. What is the bond's capital gain or loss yield?

Cap. Gain/loss yield =
Cap. Gain/loss yield =
Cap. Gain/loss yield =

Yield to maturity
7.06%
-0.21%

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 =
Annualized Nominal YTC =

3.16%
6.33%

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
bond is likely to be called and replaced, hence that the YTC will probably be earned.

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
bond is likely to be called and replaced, hence that the YTC will probably be earned.
NOW ANSWER THE FOLLOWING NEW QUESTIONS:

e. How would the price of the bond be affected by changing the going market interest rate? (Hint: Conduct a sensitivity analysis of
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 an
Nominal market rate, r:
Value of bond if it's not called:
Value of bond if it's called:

8%
$1,000.00
$1,027.02

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:

Rate, r
0%
2%
4%
6%
8%
10%
12%
14%
16%

Not called
$1,000.00

Value of Bond If:

Called
$1,027.02

Actual value,
considering
call likehood:
$1,440.00

f. Now assume the date is 10/25/2010. Assume further that a 12%, 10-year bond was issued on 7/1/2010, pays interest semiannually
bonds yield.
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
shown below:

Settlement (today)
Maturity
Coupon rate
Current price (% of par)
Redemption (% of par value)
Frequency (for semiannual)
Basis (360 or 365 day year)

Yield to Maturity:

Basic info:
10/25/2010
7/1/2020
12%
110
100
2
1

10.34% Hint: Use the Yield function.For dates, either refer to cells D122 and D123, or ent

To find the yield to call, use the YIELD function, but with the call price rather than par value as the redemption
Yield to call:

Err:502

You could also use Excel's "Price" function to find the value of a bond between interest payment dates.

Chapter 5. Ch05 P24 Build a Model

e 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.)

Hint: This is a nominal rate, not the effective rate. Nominal rates are generally quoted.

Bond's Current Price

$1,100

Hint: Write formula in words.

Hint: Cell formulas should refer to Input S
(Answer)

Current yield
7.27%

Hint: Write formula in words.

Hint: Cell formulas should refer to Input S
(Answer)

This is a nominal rate, not the effective rate. Nominal rates are generally quoted.

ed, 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
will probably be earned.

ging the going market interest rate? (Hint: Conduct a sensitivity analysis of price to changes in the going market interest rate for the bond. Assum
t falls below the coupon rate. That is an oversimplification, but assume it anyway for purposes of this problem.)

The bond would not be called unless r<coupon.

different r's, in a 2-output data table, and then use an IF

hat a 12%, 10-year bond was issued on 7/1/2010, pays interest semiannually (January 1 and July 1), and sells for $1,100. Use your spreadsheet to

o 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 inp

Hint: Use the Yield function.For dates, either refer to cells D122 and D123, or enter the date in quotes, such as "10/25/2010".

he call price rather than par value as the redemption

e of a bond between interest payment dates.

1/22/2015

been issued.)

ormula in words.
mulas should refer to Input Section

ormula in words.
mulas should refer to Input Section

of the interest imcome. Note too that the

est rate for the bond. Assume that the

00. Use your spreadsheet to find the

r. Begin by setting up the input data as