solutions-assignment 1 - Chapter 5 2. a b. c. P = $1,000.00...

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Chapter 5 2. a P = $1,000.00 (sell at par) =PRICE(DATE(2000,1,1),DATE(2025,1,1),0.07,0.07,100,2,0)*10 b. P = $802.38 (sell at a discount) =PRICE(DATE(2000,1,1),DATE(2025,1,1),0.07,0.09,100,2,0)*10 c. P = $1,283.62 (sell at a premium) =PRICE(DATE(2000,1,1),DATE(2025,1,1),0.07,0.05,100,2,0)*10 3. =YIELD(DATE(2000,1,1),DATE(2010,1,1),0.078,105,100,2,0) YTM = 7.09% 13. Here we are finding the YTM of semiannual coupon bonds for various maturity lengths. The bond price equation is: Miller Corporation bond: P 0 = $1,168.90=PRICE(DATE(2000,1,1),DATE(2013,1,1),0.09,0.07,100,2,0)*10 P 1 = $1,160.58 P 3 = $1,142.12 P 8 =$1,083.17 P 12 =$1,019.00 P 13 = $1,000=PRICE(DATE(2000,1,1),DATE(2013,1,1),0.09,0.07,100,2,0)*10 Modigliani Company bond: P 0 = $848.53=PRICE(DATE(2000,1,1),DATE(2013,1,1),0.07,0.09,100,2,0)*10 P 1 = $855.05 P 3 =$869.92 P 8 = $920.87 P 12 = $981.27 P 13 = $1,000=PRICE(DATE(2012,12,31),DATE(2013,1,1),0.07,0.09,100,2,0)*10 All else held equal, the premium over par value for a premium bond declines as maturity approaches, and the discount from par value for a discount bond declines as maturity approaches. This is called “pull to par.” In both cases, the largest percentage price changes occur at the shortest maturity lengths. Also, notice that the price of each bond when no time is left to maturity is the par value, even though the purchaser would receive the par value plus the coupon payment immediately. This is because we calculate the clean price of the bond.
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23. To find the capital gains yield and the current yield, we need to find the price of the bond. The current price of Bond P and the price of Bond P in one year is: P: P 0 = $1,082.00=PRICE(DATE(2000,1,1),DATE(2005,1,1),0.09,0.07,100,1,0)*10 P 1 =$1,067.74=PRICE(DATE(2001,1,1),DATE(2005,1,1),0.09,0.07,100,1,0)*10 Current yield = $90 / $1,082.00 = .0832 or 8.32% : Capital gains yield = (New price – Original price) / Original price Capital gains yield = ($1,067.74 – 1,082.00) / $1,082.00 = –0.0132 or –1.32% The current price of Bond D and the price of Bond D in one year is: D: P 0 = $918.00=PRICE(DATE(2000,1,1),DATE(2005,1,1),0.05,0.07,100,1,0)*10 P 1 = $932.26=PRICE(DATE(2001,1,1),DATE(2005,1,1),0.05,0.07,100,1,0)*10 Current yield = $50 / $918.00 = 0.0545 or 5.45% Capital gains yield = ($932.26 – 918.00) / $918.00 = 0.0155 or 1.55% All else held constant, premium bonds pay a high current income while having price depreciation as maturity nears; discount bonds pay a lower current income but have price appreciation as maturity nears. For either bond, the total return is still 7%, but this return is distributed differently between current income and capital gains. 24.
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This note was uploaded on 04/17/2011 for the course FINANCE 1001 taught by Professor Lochengshu during the Spring '11 term at National Cheng Kung University.

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solutions-assignment 1 - Chapter 5 2. a b. c. P = $1,000.00...

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