ch04boc-model - A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17...

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1 of 5 Worksheet for Chapter 4 BOC Questions 2/3/03 We use this model to illustrate some points about the bond valuation. gains yield for coming year, YTM, and YTC. Today's date: 2/15/02 Typically, we show inputs in blue. Maturity: 1/6/19 Enter dates with hyphen first. First call: 1/6/09 Coupon rate: 8.5% We often talk about $1,000 par bonds par value, but Current price: 93 they can be sold in any denomimation.Therefore, in Call price: 108 practice they are quoted as a % of par. Thus, 93 Maturity value: 100 means the bonds sell at 93% of par, and 108 means Payments per year: 2 they can be called with an 8% call premium. Current yield: 9.14% = Annual coupon / Current price Expected capital gains yield: Err:502 This is just the YTM - Current yield. YTM: Err:502 These are more complicated. They are calculated YTC: Err:502 below. YTM: 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. YTC: 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 lower rate. 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
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