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Consider the following three U.S. corporate bonds. Assume that all three were issued on 8/1/5/2004, their first coupon date was 2/15/2005, and they use semiannual compounding:

Coupon Rate Maturity Date Yield to Maturity

0% 8/15/2024 4.00%

4% 8/15/2024 4.00%

4% 8/15/2029 4.00%

Use the Scenario Analysis Tab in the Bond Price Yield Calculator.xls spreadsheet to answer these questions.

Calculate each bond's price if the settlement date is 8/15/2017.

Coupon Rate Maturity Date Yield to Maturity Price on 8/15/2017

0% 8/15/2024 4.0%

4% 8/15/2024 4.0%

4% 8/15/2029 4.00%

Since 8/15/2017 is a coupon date, there is no accrued interest on the settlement date.

Calculate the total return for each security assuming it was purchased on the 8/15/2017 settlement date, and then sold on the Horizon date of 11/15/2017. Use the Scenario Analysis table in the Scenario Analysis tab on the Bond Price-Yield calculator to obtain the relevant information to fill in the tables below. Check a few of the return calculations with your own calculators to confirm the findings and help you understand the calculations.

Coupon Rate Maturity Date Yield on Horizon Date Price on Horizon Date

0% 5/15/2024 3.5%

0% 5/15/2024 4.0%

0% 5/15/2024 4.5%

4% 5/15/2024 3.5%

4% 5/15/2024 4.0%

4% 5/15/2024 4.5%

4% 5/15/2029 3.5%

4% 5/15/2029 4.0%

4% 5/15/2029 4.5%

Coupon Rate Maturity Date Yield at Horizon Total Return ($) Total Return (%)

0% 5/15/2024 3.50%

0% 5/15/2024 4.00%

0% 5/15/2024 4.50%

4% 5/15/2024 3.50%

4% 5/15/2024 4.00%

4% 5/15/2024 4.50%

4% 5/15/2029 3.50%

4% 5/15/2029 4.60%

4% 5/15/2029 5.10%

Compare your findings. Assuming that each of these 3 outcomes for each bond was equally likely, which bond has the greatest return variability? Explain why.

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