Question

Chapter 5, problem 24 of Financial Management: Theory and Practice 15th Edition.

Start with the partial model in the file Ch05 P24 Build a Model.xlsx on the textbook’s Web site. A 20-year, 8% semiannual coupon bond with a par value of $1,000 may be calledin5yearsatacallpriceof$1,040.Thebondsellsfor$1,100.(Assumethatthebond has just been issued.) a. What is the bond’s yield to maturity? b. What is the bond’s current yield? c. What is the bond’s capital gain or loss yield? d. What is the bond’s yield to call? e. Howwouldthepriceofthebondbeaffectedbyachangeinthegoingmarketinterest rate? (Hint: Conduct a sensitivity analysis of price to changes in the going market interestrateforthebond.Assumethatthebondwillbecalledifandonlyifthegoing rate of interest falls below the coupon rate. This is an oversimplification, but assume it for purposes of this problem.) f. Now assume the date is October 25, 2017. Assume further that a 12%, 10-year bond was issued on July 1,2017,pays interest semiannually (on January 1 and July 1), and sells for $1,100. Use your spreadsheet to find the bond’s yield.

Answer 1