Worksheet for Chapter 4 BOC Questions
We use this model to illustrate some points about the bond valuation.
gains yield for coming year, YTM, and YTC.
Typically, we show inputs in blue.
Enter dates with hyphen first.
We often talk about $1,000 par bonds par value, but
they can be sold in any denomimation.Therefore, in
practice they are quoted as a % of par. Thus, 93
means the bonds sell at 93% of par, and 108 means
Payments per year:
they can be called with an 8% call premium.
= Annual coupon / Current price
Expected capital gains yield:
This is just the YTM - Current yield.
These are more complicated.
They are calculated
Err:502 Click fx > Financial > Yield > OK to bring up the Yield menu. Then
point and click to fill in the menu cells. You must scroll down to
complete the menu, and you can leave "basis" blank. We assume
settlement is today, though it is normally 4 days after the trade date.
The completed dialog box is shown to the right.
Note that you must scroll
down to get to "frequency" to complete the dialog box.
Also, leave the
"basis" box blank and Excel will use as the default a standard 360 day year.
Err:502 We use the Yield function again, but use the call date for the maturity and
call price for the redemption price. The completed dialog box is to the right.
If interest rates remain at the current level, then the bonds will not be called.
New bonds would cost
the company about 9.3%, so it would not call 8.5% bonds to replace them with 9.3% bonds.
Of course, we do not know that interest rates will remain at current levels.
Indeed, there is always a
chance that interest rates will fall from whatever level they are at, and if rates fall enough, then the
bonds will be called.
If you owned the bonds, you should not want to have them called.
True, you would then earn the YTC,
which is higher than the YTM, but you would get your money back and then have to reinvest at a
Your average earned rate of return out to the maturity date would be less than the YTM.
Remember, companies only call bonds if it is advantageous to them, which means disadvantageous to