Question

Problem 1:	You are considering investing in a 10-year bond issued by NewEnergy Inc. This bond has $1000 face value, 4% coupon rate.
The bond pays coupons semi-annually and is currently selling at $920. The bond can be called at a $1,040 in 3 years.

Draw a chart to show the relationship between bond yield and bond price.  

Yield versu Price Data
Yield	Price
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%

Answer 1

We will find the price of the bond at various yields. As the coupon is paid semi-annually we will divide the coupon by 2 as its paid semi-annually and we will multiply the no of years by 2 to get the no of periods

We will find the current yield of the bond with the current price of 920. we have used the formula Rate in excel. The current yield of the bond is 2.514%

Yield	Face value of the bond	Coupon	No of Years	Present value of the Bond
2.514%	-1000	-20	20	920.00

Yield of the bond if the bond is callable for 1040 in 3 years

Yield	Face value of the bond	Coupon	No of Years	Present value of the Bond
1.303%	-1000	-20	6	1,040.00

Yield	Face value of the bond	Coupon	No of Years	Present value of the Bond
0%	-1000	-20	20	1,400.00
1%	-1000	-20	20	1,180.46
2%	-1000	-20	20	1,000.00
3%	-1000	-20	20	851.23
4%	-1000	-20	20	728.19
5%	-1000	-20	20	626.13
6%	-1000	-20	20	541.20
7%	-1000	-20	20	470.30
8%	-1000	-20	20	410.91
9%	-1000	-20	20	361.00
10%	-1000	-20	20	318.91
11%	-1000	-20	20	283.30
12%	-1000	-20	20	253.06
13%	-1000	-20	20	227.28
14%	-1000	-20	20	205.22
15%	-1000	-20	20	186.29