Question

1. Describe following for Bonds :
   1.   coupon rate
   2.   current yield
   3. Yield to maturity
2. Which ones of the above rates/yield can change over the life of the bond and if yes, why? ( 10 points)
3. Research and find a bond for large blue chip company like McDonald, Intel, GE or any other from Dow Jones 30 list. Provide following ( and list source)
   1. Bond information : Company, rating
   2. Maturity date
   3. Current price
   4. Coupon rate %
   5. Current yield %
   6. Yield to Maturity (YTM)

4. if overall interest rates in the economy start to go up, what will happen to the price of the bonds? Explain? ( 10 points)

5. What is a callable bond and in what type of interest environment would the lenders exercise the call option on the bond and why? ( 10 points)

EXCEL EXCERCISES:

6. Calculate Bond price :
   • Par Value : $ 1000
   • Coupon rate : 3 % ( paid annually)
   • Yield to maturity rate (YTM) : 5 %
   • Time to maturity 10 years

Answer 1

Coupon rate is the amount paid by the issuer of the bond at the book value. it is the rate of interset to be paid every year by the issuer of bond at the book value of the bond to the purchaser of the bond. for example, if suppose say RONALD company(ISSUER) issues a bond of face value $2000 at the coupon rate of 10% . this coupon rate is fixed and is written on the bond certificate which is to be paid anually or bi-anually. if say TRAMP (PURCHASER)bought a bond from this company he will receive a fix amount of $200 every year untill maturity irrespective of market price of the bond.

CURRENT YIELD = ANNUAL INCOME / CURRENT PRICE OF THE BOND

in the above example there are 10% bonds at a price of 2000$ . we know, that the fixed income that is coupon rate will be fixed 200 $ no matter what would be the market price of the bond or one can say at which we have purchased the bond .

suppose DONALD has purchased the bond for $2100

so current yield = 200/ 2100 = .095 or 9.5 %

if he bought it for 1900$ current yield would be = 200/ 1900 = .105 or 10.5%  

if bought at face value that is $2000 current yield is same as of coupon rate that is 200/ 2000 = 10%

so it is clear from the above study that current yield is the investors return earned annually on investment. higher the price paid for the bond lower would be the return / yield on investment .

YIELD TO MATURITY : it refers to sum of all interest payments from the date of purchase of bond till its maturity. it is the percentage rate of return of the bond till the maturity.

from the above example annual interest is 200 $, par value 2000$ , market price is $2100, no of years to maturity say 10 years

sp ytm = { 200+{(2000-2100)/10} / (2000+2100)/2 = 9.2%

so it is clear that current yield and yield to maturity can change with the change in market price if they are purchased later on at a market price . if they are purchased at book value then coupon rate= current yield = yield to maturity as explained above.

COMPANY NAME intel corporation

bond name INTEL CORp. 17/24

RATINGS MOODY'S RATING A1

COUNTRY USA

ISSUE PRICE $ 99.98

ISSUE DATE 5/11/2017

COUPON RATE 2.875%

MATURITY DATE 5/11/2024

PAYMENTS PER YEAR 2

YIELD 1.03%  

MODIFIED DURATION 7.2940

ACCRUED INTEREST .0312

IF THE overall interest rate in the economy starts to go up then the bonds will become less attractive as no one would prefer to buy low interest coupon bonds.

collable bonds are the bonds which gives the right to the issuer of the bond to take back its obligation to pay the money before the maturity . that is before the maturity of the bond it pays all its obligation and release itself from any kind of debt obligations to pay .

Maturity(years)	10		10 =NPER
Coupon rate	3%		3.00%
Coupon PMT	30		$30.00
Par value	1000		$1,000.00
YTM	5%		5%
Present value	($845.57)