Consider a bond with market value $92.37 (face value = $100) and a coupon of $5.059...

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Consider a bond with market value $92.37 (face value = $100) anda coupon of $5.059 dollars paid every six months (Semi-annually -December and June). The time to maturity is 10 semiannual periods.Assume today is January 1st, 2015. Therefore, the face value of thebond will be repaid on December 2019.
Upload your spreadsheet on the course website (you might want touse the spreadsheet “11 Bond Yield and Duration Example” that weanalyzed in class as a starting point for your calculations) andprovide the answers to the following questions on paper.
Compute the annual YTM of the bond, using Excel Solver (note:the question asks for the annual YTM, not the semiannual. If youcompute the semiannual YTM, you must compound it using theeffective annual rate formula). [1.25 points]
Compute the duration of the bond. Please say clearly what unityou are using, e.g. duration is N years or duration is N semiannualperiods. [1 point]
Four years from now, if the YTM remains constant, what will bethe resale price of the bond? (HINT: since time to maturity is now10 semiannual periods, the bond will have a time to maturity of twosemiannual periods, four years from now; the cash-flow that youmust consider to compute the price are two coupon payments, and theface value repaid at maturity). [1.25 points]
If the reinvestment rate is equal to the YTM, what is theterminal value of the portfolio after 4 years? (HINT: the terminalvalue of the portfolio is the sum of the coupons reinvest at thereinvestment rate, plus the revenues from selling the bond 4 yearsfrom now) [1.25 points]
If the reinvestment rate is now 5% (semiannual), what is theterminal value of the portfolio after 4 years? Why is it almost thesame as your previous answer? Why isn’t it exactly the same as yourprevious answer? (HINT: the change in the reinvestment rate affectsboth the value of the reinvest coupons, and the resale price of thebond). [1.25 points]

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4.4 Ratings (736 Votes)

CALCULATION OF YTMPvCurrent Market Value9237NperNumber of semi annual period to maturity10PmtSemi annual coupon payment5059FvRedemption payment at end of 10 See Answer

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Transcribed Image Text

Consider a bond with market value $92.37 (face value = $100) anda coupon of $5.059 dollars paid every six months (Semi-annually -December and June). The time to maturity is 10 semiannual periods.Assume today is January 1st, 2015. Therefore, the face value of thebond will be repaid on December 2019.Upload your spreadsheet on the course website (you might want touse the spreadsheet “11 Bond Yield and Duration Example” that weanalyzed in class as a starting point for your calculations) andprovide the answers to the following questions on paper.Compute the annual YTM of the bond, using Excel Solver (note:the question asks for the annual YTM, not the semiannual. If youcompute the semiannual YTM, you must compound it using theeffective annual rate formula). [1.25 points]Compute the duration of the bond. Please say clearly what unityou are using, e.g. duration is N years or duration is N semiannualperiods. [1 point]Four years from now, if the YTM remains constant, what will bethe resale price of the bond? (HINT: since time to maturity is now10 semiannual periods, the bond will have a time to maturity of twosemiannual periods, four years from now; the cash-flow that youmust consider to compute the price are two coupon payments, and theface value repaid at maturity). [1.25 points]If the reinvestment rate is equal to the YTM, what is theterminal value of the portfolio after 4 years? (HINT: the terminalvalue of the portfolio is the sum of the coupons reinvest at thereinvestment rate, plus the revenues from selling the bond 4 yearsfrom now) [1.25 points]If the reinvestment rate is now 5% (semiannual), what is theterminal value of the portfolio after 4 years? Why is it almost thesame as your previous answer? Why isn’t it exactly the same as yourprevious answer? (HINT: the change in the reinvestment rate affectsboth the value of the reinvest coupons, and the resale price of thebond). [1.25 points]