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    Bond Valuation

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    manoranjan838241
    This document provides solutions to end-of-chapter questions and problems from a chapter on bond valuation. It includes explanations and calculations of bond prices, yields, and sensitivities to interest rate changes for various bond scenarios. Key aspects covered are the inverse relationship between bond prices and interest rates, the call provision impact on callable bonds, and bond price calculations using a financial calculator.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Bond Valuation

    Uploaded by

    manoranjan838241
    77 views4 pages
    This document provides solutions to end-of-chapter questions and problems from a chapter on bond valuation. It includes explanations and calculations of bond prices, yields, and sensitivities to interest rate changes for various bond scenarios. Key aspects covered are the inverse relationship between bond prices and interest rates, the call provision impact on callable bonds, and bond price calculations using a financial calculator.

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    © © All Rights Reserved

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    This document provides solutions to end-of-chapter questions and problems from a chapter on bond valuation. It includes explanations and calculations of bond prices, yields, and sensitivities to interest rate changes for various bond scenarios. Key aspects covered are the inverse relationship between bond prices and interest rates, the call provision impact on callable bonds, and bond price calculations using a financial calculator.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    77 views4 pages

    Bond Valuation

    Uploaded by

    manoranjan838241
    This document provides solutions to end-of-chapter questions and problems from a chapter on bond valuation. It includes explanations and calculations of bond prices, yields, and sensitivities to interest rate changes for various bond scenarios. Key aspects covered are the inverse relationship between bond prices and interest rates, the call provision impact on callable bonds, and bond price calculations using a financial calculator.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 4

    Chapter 4

    Bond Valuation
    ANSWERS TO END-OF-CHAPTER QUESTIONS

    4-2 False. Short-term bond prices are less sensitive than long-term bond prices to interest
    rate changes because funds invested in short-term bonds can be reinvested at the new
    interest rate sooner than funds tied up in long-term bonds.

    4-4 If interest rates decline significantly, the values of callable bonds will not rise by as much
    as those of bonds without the call provision. It is likely that the bonds would be called by
    the issuer before maturity, so that the issuer can take advantage of the new, lower rates.

    SOLUTIONS TO END-OF-CHAPTER PROBLEMS

    4-3 With your financial calculator, enter the following to find YTM:

    N = 10 × 2 = 20; PV = -1100; PMT = 0.08/2 × 1,000 = 40; FV = 1000; I = YTM = ?


    YTM = 3.31% × 2 = 6.62%.

    With your financial calculator, enter the following to find YTC:

    N = 5 × 2 = 10; PV = -1100; PMT = 0.08/2 × 1,000 = 40; FV = 1050; I = YTC = ?


    YTC = 3.24% × 2 = 6.49%.

    4-4 With your financial calculator, enter the following to find the current value of the bonds,
    so you can then calculate their current yield:

    N = 7; I = YTM = 8; PMT = 0.09 × 1,000 = 90; FV = 1000; PV = VB = ?


    PV = $1,052.06. Current yield = $90/$1,052.06 = 8.55%.

    Alternatively,

    VB = $90(PVIFA8%,7) + $1,000(PVIF8%,7)
    = $90((1- 1/1.087)/0.08) + $1,000(1/1.087)
    = $90(5.2064) + $1,000(0.5835)
    = $468.58 + $583.50 = $1,052.08.

    Current yield = $90/$1,052.08 = 8.55%.


    4-5 The problem asks you to find the price of a bond, given the following facts:

    N = 16; I = 8.5/2 = 4.25; PMT = 45; FV = 1000.

    With a financial calculator, solve for PV = $1,028.60

    4-6 a. VB = PMT(PVIFAi,n) + FV(PVIFi,n)


    = PMT((1- 1/(1+in))/i) + FV(1/(1+i)n)

    1. 5%: Bond L: VB = $100(10.3797) + $1,000(0.4810) = $1,518.97.


    Bond S: VB = ($100 + $1,000)(0.9524) = $1,047.64.

    2. 8%: Bond L: VB = $100(8.5595) + $1,000(0.3152) = $1,171.15.


    Bond S: VB = ($100 + $1,000)(0.9259) = $1,018.49.

    3. 12%: Bond L: VB = $100(6.8109) + $1,000(0.1827) = $863.79.


    Bond S: VB = ($100 + $1,000)(0.8929) = $982.19.

    Calculator solutions:

    1. 5%: Bond L: Input N = 15, I = 5, PMT = 100, FV = 1000, PV = ?, PV =


    $1,518.98.
    Bond S: Change N = 1, PV = ? PV = $1,047.62.

    2. 8%: Bond L: From Bond S inputs, change N = 15 and I = 8, PV = ?, PV =


    $1,171.19.
    Bond S: Change N = 1, PV = ? PV = $1,018.52.

    3. 12%: Bond L: From Bond S inputs, change N = 15 and I = 12, PV = ? PV =


    $863.78.
    Bond S: Change N = 1, PV = ? PV = $982.14.

    b. Think about a bond that matures in one month. Its present value is influenced
    primarily by the maturity value, which will be received in only one month. Even if
    interest rates double, the price of the bond will still be close to $1,000. A one-year
    bond's value would fluctuate more than the one-month bond's value because of the
    difference in the timing of receipts. However, its value would still be fairly close to
    $1,000 even if interest rates doubled. A long-term bond paying semiannual coupons,
    on the other hand, will be dominated by distant receipts, receipts which are multiplied
    by 1/(1 + rd/2)t, and if rd increases, these multipliers will decrease significantly.
    Another way to view this problem is from an opportunity point of view. A one-
    month bond can be reinvested at the new rate very quickly, and hence the opportunity
    to invest at this new rate is not lost; however, the long-term bond locks in subnormal
    returns for a long period of time.
    4-8 $1,000 = $140((1- 1/(1+rd6))/rd) + $1,090(1/(1+rd)6).

    Try 18 percent:

    PV18% = $140(3.4976) + $1,090(0.3704)= $489.66 + $403.74 = $893.40.


    18 percent is too high.

    Try 15 percent:

    PV15% = $140(3.7845) + $1,090(0.4323)= $529.83 + $471.21 = $1,001.04.

    15 percent is slightly low.

    The rate of return is approximately 15.03 percent, found with a calculator using the
    following inputs.

    N = 6; PV = -1000; PMT = 140; FV = 1090; I = ? Solve for I = 15.03%.

    4-9 a. Using a financial calculator, input the following:

    N = 20, PV = -1100, PMT = 60, FV = 1000, and solve for I = 5.1849%.

    However, this is a periodic rate. The nominal annual rate = 5.1849%(2) = 10.3699%
    ≈ 10.37%.

    b. The current yield = $120/$1,100 = 10.91%.

    c. YTM = Current Yield + Capital Gains (Loss) Yield


    10.37% = 10.91% + Capital Loss Yield
    -0.54% = Capital Loss Yield.

    d. Using a financial calculator, input the following:

    N = 8, PV = -1100, PMT = 60, FV = 1060, and solve for I = 5.0748%.

    However, this is a periodic rate. The nominal annual rate = 5.0748%(2) = 10.1495%
    ≈ 10.15%.
    4-10 The problem asks you to solve for the YTM, given the following facts:

    N = 5, PMT = 80, and FV = 1000. In order to solve for I we need PV.

    However, you are also given that the current yield is equal to 8.21%. Given this
    information, we can find PV.

    Current yield = Annual interest/Current price


    0.0821 = $80/PV
    PV = $80/0.0821 = $974.42.

    Now, solve for the YTM with a financial calculator:

    N = 5, PV = -974.42, PMT = 80, and FV = 1000. Solve for I = YTM = 8.65%.

    4-11 The problem asks you to solve for the current yield, given the following facts: N = 14, I
    = 10.5883/2 = 5.2942, PV = -1020, and FV = 1000. In order to solve for the current yield
    we need to find PMT. With a financial calculator, we find PMT = $55.00. However,
    because the bond is a semiannual coupon bond this amount needs to be multiplied by 2 to
    obtain the annual interest payment: $55.00(2) = $110.00. Finally, find the current yield
    as follows:

    Current yield = Annual interest/Current Price = $110/$1,020 = 10.78%.

    4-13 a. The bonds now have an 8-year, or a 16-semiannual period, maturity, and their value
    is calculated as follows:

    16
    $50 $1,000
    VB = ∑ +
    t 16
    = $50(12.5611) + $1,000(0.6232)
    t =1 (1.03 ) (1.03 )
    = $628.06 + $623.20 = $1,251.26.

    Calculator solution: Input N = 16, I = 3, PMT = 50, FV = 1000,


    PV = ? PV = $1,251.22.

    b. VB = $50(10.1059) + $1,000(0.3936) = $505.30 + $393.60 = $898.90.

    Calculator solution: Change inputs from Part a to I = 6, PV = ?


    PV = $898.94.

    c. The price of the bond will decline toward $1,000, hitting $1,000 (plus accrued
    interest) at the maturity date 8 years (16 six-month periods) hence.

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