Fall 1, 2012
Chapter 5. Ch 05 P24 Build a Model
Except for charts and answers that must be written, only Excel formulas that use cell references or fun
Numeric answers in cells will not be accepted.
Basic Input Data:
Years to maturity:
20
Periods per year:
2
Periods to maturity:
Coupon rate:
8%
Par value:
$1,000
Periodic payment:
Current price
$1,100
Call price:
$1,040
Years till callable:
5
Periods till callable:
a.
What is the bond's yield to maturity?
Periodic YTM =
Annualized Nominal YTM
=
b.
What is the bond's current yield?
Current yield
=
Hint: Write formula in words.
Current yield
=
/
Hint: Cell formulas should refer to Input Section
Current yield
=
(Answer)
c.
What is the bond's capital gain or loss yield?
Cap. Gain/loss yield =

Hint: Write formula in words.
Cap. Gain/loss yield =

Hint: Cell formulas should refer to Input Section
Cap. Gain/loss yield =
(Answer)
d.
What is the bond's yield to call?
Here we can again use the Rate function, but with data related to the call.
Peridodic YTC =
Annualized Nominal YTC
=
NOW ANSWER THE FOLLOWING NEW QUESTIONS:
Nominal market rate, r:
8%
Value of bond if it's not called:
Value of bond if it's called:
The bond would not be called unless r<coupon.
We can use the two valuation formulas to find values under different r's, in a 2output data table, and then use an IF
statement to determine which value is appropriate:
Value of Bond If:
Actual value,
Not called
Called
considering
Rate, r
$0.00
$0.00
call likehood:
0%
$0.00
$0.00
$0.00
2%
$0.00
$0.00
$0.00
4%
$0.00
$0.00
$0.00
6%
$0.00
$0.00
$0.00
8%
$0.00
$0.00
$0.00
10%
$0.00
$0.00
$0.00
12%
$0.00
$0.00
$0.00
14%
$0.00
$0.00
$0.00
16%
$0.00
$0.00
$0.00
Basic info:
Settlement (today)
Maturity
Coupon rate
Current price (% of par)
Redemption (% of par value)
Frequency (for semiannual)
Basis (360 or 365 day year)
Yield to Maturity:
Hint: Use the Yield function. For dates, either refer to cells in Basic Info above, or enter the date in quotes, such as
A 20year, 8% semiannual coupon bond with a par value of $1,000 may be called in 5 years at a call price of $1,040. The
bond sells for $1,100. (Assume that the bond has just been issued.)
Hint: This is a
nominal rate,
not the effective rate.
Nominal rates are g
Note that this is an
economic loss
, not a loss for tax purposes.
This is a
nominal rate,
not the effective rate.
Nominal rates are generall
The YTC is lower than the YTM because if the bond is called, the buyer will lose the difference between the call price and the
current price in just 4 years, and that loss will offset much of the interest imcome.
Note too that the bond is likely to be called
and replaced, hence that the YTC will probably be earned.
e.
How would the price of the bond be affected by changing the going market interest rate? (Hint: Conduct a sensitivity
analysis of price to changes in the going market interest rate for the bond. Assume that the bond will be called if and
only if the going rate of interest falls below the coupon rate. That is an oversimplification, but assume it anyway for
purposes of this problem.)
f.
Now assume the date is 10/25/2010.
Assume further that a 12%, 10year bond was issued on 7/1/2010, pays interest
semiannually (January 1 and July 1), and sells for $1,100.
Use your spreadsheet to find the bond’s yield.
Refer to this chapter's Tool Kit for information about how to use Excel's bond valuation functions. The model finds the price of
a bond, but the procedures for finding the yield are similar.
Begin by setting up the input data as shown below: