Question

In: Finance

Write a 1-2 page of the analysis of the bonds. In your analysis you should answer...

Write a 1-2 page of the analysis of the bonds. In your analysis you should answer the following questions. Please explain your answer to each question.

a)How much is the YTM listed in quotations is for the bonds? Explain the meaning of YTM?

If you are going to buy a bond issued by THE COMPANY, which bond would you choose? Why?

Are these bonds callable? If the bonds that you chose are callable (non-callable), will it change your decision to buy them?

If you are an investor who is looking for a bond to invest in, are you going to buy a bond that you chose? You should develop a specific recommendation, with supporting rationale to explain your answer

Price of the Bond = PV (6.845%,8,1000,0) = $588.80

Coupon payment

Face value

1000

Maturity

3

Price

-796.04

Yield maturity

7.90

PMT (7.90%,3,-796.04,1000)

0.05

PMT *2

0.05*2

Payment /Face Value

11.00

Yield of the bond

Present Value

796.04

Interest

7.90

Future Value

1000

Years

3

year

0

-796.04

1

0.0

2

0.0

3

1000

RATE (3,0, -796.04,1000,0)

7.90%

IRR (B14:B22)

7.90%

Solutions

Expert Solution

Ans : YTM stands for Yield to maturity as the name suggest , it is the interest rate/yield earned on the bond if it is kept till maturity.

Given that, Price of the Bond = PV (6.845%,8,0,1000) = $588.80 , Maturity in this case = 8 years and Yield = 6.845%

So, we can say here that If this bond with price = 588.80 will be kept for 8 years, it will give a total yield of 6.845%

For the other bond, whose present value is given as 796.04 is having the yield to maturity , YTM = 7.90% and maturity is for 3 years.

In case If I would choose , it will be the one having more YTM, as yield on the bond higher, return is higher. Hence the bond with YTM 7.90% is the better option.

As we can see here that Payment /Face Value = 11 , i.e. Payment = 1100 and this is zero coupon bond as rate = IRR and payment is made at maturity only. This bond seems to be callable as 100 bucks seems to be paid extra.

Callable bond is bond whihc the issuer can redeem the bond before maturity at some fixed price, the risk is higherin this case but return is also high. So, definitely in case if investor is risk averse, he will choose the non callable bond over this.

jeff jeffy answered 2 years ago
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