Bond and Their Valuation

A.) Indicate whether bond is trading at a premium, at a discount, or at par.

Bond A is selling at discount because its coupon rate (7%) is lesser than the yield to
maturity rate (9%). Bond B is selling at par because its coupon rate (9%) is equal to the
yield to maturity rate (9%). Bond C is selling at premium because its coupon rate (11%)
is greater than the yield to maturity rate (9%).

B.) Calculate the price of each bonds

Vb= (Par Value * Coupon Rate)

MV
(1( 1+i )i)
+ (1+i)n
i

Bond A
Vb= (1 000 0.07)

1000
(1( 1+0.09 )12 )
+
(1+.09)12
0.09

= $856.79

1000
(1( 1+0.09 )12 )
+
(1+.09)12
0.09

= $1 000.00

1000
(1( 1+0.09 )12 )
+
(1+.09)12
0.09

= $1 143.21

Bond B
Vb= (1 000 0.09)
Bond C
Vb= (1 000 0.11)

C.) Calculate the current yield

Coupon Pmt = Coupon Rate Par Value
Pmt a

= 7% 1000

= $ 70

Pmt b

= 9% 1000

= $ 90

Pmt c

= 11% 1000

= $ 110

Current Yield = Coupon Payment / Price

CY a

= 70 / 856.79

= 8.17%

CY b

= 90 / 1 000

= 9.00%

CY c

= 110 / 1 143.21

= 9.62%

D.)
Current Price
Bond A
Vb= (1 000 0.07)

1000
(1( 1+0.09 )11 )
11
+
(1+.09)
0.09

= $863.90

1000
(1( 1+0.09 )11 )
+ (1+.09)11
0.09

= $1000.00

Bond B
Vb= (1 000 0.09)
Bond C
1000
(1( 1+0.09 )11 )
11
+
(1+.09)
0.09

Vb= (1 000 0.011)

= $1136.10

Beginning Price
Bond A
12

Vb= (1 000 0.07)

(1( 1+0.09 )
0.09

1000
+ (1+0.09)12

= $856.79

1000
+ (1+0.09)12

= $1 000.00

Bond B
12

Vb= (1 000 0.09)

(1( 1+0.09 )
0.09

Bond C
12

Vb= (1 000 0.011)

(1( 1+0.09 )
0.09

1000
+ (1+0.09)12

Expected Capital Gains Yield

Capital Gains Yield =

Price
Beginning Price

Bond A
Capital Gains Yield =

863.90856.79
=
856.79

.83%

= $1 143.21

Bond B
Capital Gains Yield =

10001000
=
1000

0%

1136.101143.21
=
1143.21

.62%

Bond C
Capital Gains Yield =

Current Yield = Coupon Payment / Price

CY a

= 70 / 863.9

= 8.17%

CY b

= 90 / 1000

= 9.00%

CY c

= 110 / 1136.1

= 9.62%

Expected Total Return

Expected Total Return = YTM or Current Yield + Capital Gains Yield
Bond A
Expected Total Return = 8.17% + .83% = 9%
Bond B
Expected Total Return = 9% + 0% = 9%
Bond C
Expected Total Return = 9.62% + (-.62%) = 9%

E.1)
Annual Interest payment = 80
Par Value = $1000
Market price = $1150
Number of years = 9
Market PricePar Value
n
Market Price+ Par Value
2

Annual Interest +
Yield Maturity=

10001150
9
1000+1150
2

80+

80+16.66
1095

5.892093023

= 5.89 %

E.2)
Annual Interest payment = 80
Call Price = 1040
Market price = 1150
Number of years = 5
Number of years
Call PriceMarket Price

Yield Maturity=Annual Interest +

call

Call Price+ Market Price

2

10401150
5
1040+1150
2

80+

80+22
1095

5.2968036

= 5.30 %

E.3)

Assuming the rates will not increase drastically in the next 5 years, the bond will
be called, so he would likely receive the YTC than the YTM. This is because the YTM
has a lower rate than the coupon rate and that the market price exceeds the call price.

F.)
Price risk is the risk of a decline in a bonds price due to an increase in interest
rates. Reinvestment risk is when the decline in interest will lead to a decline in income
from a bond portfolio.
The bond with the most price risk is the 10-year bond with zero coupon, because,
according to the definition, price risk is higher on bonds that have long maturities,
because interest rates will most likely change during the years, and long-term maturity
bonds are more sensitive to changes in rates The bond with the most reinvestment risk
is the 1-year bond with a 9% annual coupon, because it is short term, and because of
fluctuating interest rates, it is subject to being called, therefore it will have to be
reinvested again, most likely at bonds with lower coupons.

G.)
Years Until
Maturity
12
11
10
9
8
7
6
5
4
3
2
1
0

Bond A
$ 856.79
$ 863.90
$ 871.65
$ 880.10
$ 889.30
$ 899.34
$ 910.28
$ 922.21
$ 935.21
$ 949.37
$ 964.82
$ 981.65
$ 1 000.00

Bond B
$
$
$
$
$
$
$
$
$
$
$
$
$

1 000.00
1 000.00
1 000.00
1 000.00
1 000.00
1 000.00
1 000.00
1 000.00
1 000.00
1 000.00
1 000.00
1 000.00
1 000.00

Bond C
$ 1 143.21
$ 1 136.10
$ 1 128.35
$ 1 119.90
$ 1 110.70
$ 1 100.66
$ 1 089.72
$ 1 077.79
$ 1 064.79
$ 1 050.63
$ 1 035.18
$ 1 018.35
$ 1 000.00

$1,400.00
$1,200.00
$1,000.00
$800.00

Bond A
Bond B
Bond C

$600.00
$400.00
$200.00
$0.00
12 11 10

G.1.)
Years Until
Maturity
12
11
10
9
8
7
6
5
4
3
2
1
0

Bond A

Bond B

Bond C

8.17%
8.10%
8.03%
7.95%
7.87%
7.78%
7.69%
7.59%
7.48%
7.37%
7.26%
7.13%
7.00%

9.00%
9.00%
9.00%
9.00%
9.00%
9.00%
9.00%
9.00%
9.00%
9.00%
9.00%
9.00%
9.00%

9.62%
9.68%
9.75%
9.82%
9.90%
9.99%
10.09%
10.21%
10.33%
10.47%
10.63%
10.90%
11.00%

G.2.)
Years Until
Maturity
12
11
10
9
8
7
6
5
4
3
2
1

Bond A

Bond B

Bond C

0.83%
0.90%
0.97%
1.05%
1.13%
1.22%
1.31%
1.41%
1.52%
1.63%
1.74%
1.87%

0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%

-0.62%
-0.68%
-0.75%
-0.82%
-0.90%
-0.99%
-1.09%
-1.21%
-1.33%
-1.47%
-1.63%
-1.90%

Bond A

Bond B

Bond C

9.00%
9.00%
9.00%
9.00%
9.00%
9.00%
9.00%
9.00%
9.00%
9.00%
9.00%
9.00%

9.00%
9.00%
9.00%
9.00%
9.00%
9.00%
9.00%
9.00%
9.00%
9.00%
9.00%
9.00%

9.00%
9.00%
9.00%
9.00%
9.00%
9.00%
9.00%
9.00%
9.00%
9.00%
9.00%
9.00%

G.3.)
Years Until
Maturity
12
11
10
9
8
7
6
5
4
3
2
1

SOLUTIONS FOR G

Price of Each Bond

Vb= (Par Value * Coupon Rate)

i
MV
(1( 1+i ) )
+ (1+i)n
i

Bond A
Vb12= (1 000 0.07)

1000
(1( 1+0.09 )12 )
+
(1+.09)12
0.09

= $856.79

Vb11= (1 000 0.07)

1000
(1( 1+0.09 )11 )
11
+
(1+.09)
0.09

= $863.90

Vb10= (1 000 0.07)

1000
(1( 1+0.09 )10 )
+
(1+.09)10
0.09

= $871.65

Vb09= (1 000 0.07)

Vb08= (1 000 0.07)

9
1000
(1( 1+0.09 ) )
9
+
(1+.09)
0.09
8
1000
(1( 1+0.09 ) )
8
+
(1+.09)
0.09

= $880.10

= $889.30

Vb07= (1 000 0.07)

1000
(1( 1+0.09 )7 )
+ (1+.09)7
0.09

= $899.34

Vb06= (1 000 0.07)

1000
(1( 1+0.09 )6 )
+ (1+.09)6
0.09

= $910.28

Vb05= (1 000 0.07)

1000
(1( 1+0.09 )5 )
+ (1+.09)5
0.09

= $922.21

Vb04= (1 000 0.07)

1000
(1( 1+0.09 )4)
+ (1+.09)4
0.09

= $935.21

Vb03= (1 000 0.07)

3
1000
(1( 1+0.09 ) )
+ (1+.09)3
0.09

= $949.37

Vb02= (1 000 0.07)

1000
(1( 1+0.09 )2 )
2
+
(1+.09)
0.09

= $964.82

Vb01= (1 000 0.07)

1000
(1( 1+0.09 )1 )
1
+
(1+.09)
0.09

= $981.65

Vb00= (1 000 0.07)

0
1000
(1( 1+0.09 ) )
+
(1+.09)0
0.09

= $1000.00

Bond B
Vb12= (1 000 0.09)

1000
(1( 1+0.09 )12 )
+ (1+.09)12
0.09

= $1000.00

Vb11= (1 000 0.09)

1000
(1( 1+0.09 )11 )
+ (1+.09)11
0.09

= $1000.00

Vb10= (1 000 0.09)

1000
(1( 1+0.09 )10 )
+ (1+.09)10
0.09

= $1000.00

Vb09= (1 000 0.09)

1000
(1( 1+0.09 )9 )
+ (1+.09)9
0.09

= $1000.00

Vb08= (1 000 0.09)

1000
(1( 1+0.09 )8 )
+
(1+.09)8
0.09

= $1000.00

Vb07= (1 000 0.09)

1000
(1( 1+0.09 )7 )
7
+
(1+.09)
0.09

= $1000.00

Vb06= (1 000 0.09)

1000
(1( 1+0.09 )6 )
+
(1+.09)6
0.09

= $1000.00

Vb05= (1 000 0.09)

1000
(1( 1+0.09 )5 )
5
+
(1+.09)
0.09

= $1000.00

Vb04= (1 000 0.09)

1000
(1( 1+0.09 )4)
+
(1+.09)4
0.09

= $1000.00

Vb03= (1 000 0.09)

1000
(1( 1+0.09 )3 )
3
+
(1+.09)
0.09

= $1000.00

Vb02= (1 000 0.09)

1000
(1( 1+0.09 )2 )
+
(1+.09)2
0.09

= $1000.00

Vb01= (1 000 0.09)

1000
(1( 1+0.09 )1 )
1
+
(1+.09)
0.09

= $1000.00

Vb00= (1 000 0.09)

0
1000
(1( 1+0.09 ) )
+ (1+.09)0
0.09

= $1000.00

Bond C
Vb12= (1 000 0.11)

(1( 1+0.09 )
0.09

1000
+ (1+.09)12

= $1143.21

Vb11= (1 000 0.11)

1000
(1( 1+0.09 )11 )
11
+
(1+.09)
0.09

= $1136.10

Vb10= (1 000 0.11)

1000
(1( 1+0.09 )10 )
+
(1+.09)10
0.09

= $1128.35

Vb09= (1 000 0.11)

1000
(1( 1+0.09 )9 )
9
+
(1+.09)
0.09

= $1119.90

Vb08= (1 000 0.11)

1000
(1( 1+0.09 )8 )
8
+
(1+.09)
0.09

= $1110.70

Vb07= (1 000 0.11)

1000
(1( 1+0.09 )7 )
+
(1+.09)7
0.09

= $1100.66

Vb06= (1 000 0.11)

1000
(1( 1+0.09 )6 )
6
+
(1+.09)
0.09

= $1089.72

Vb05= (1 000 0.11)

1000
(1( 1+0.09 )5 )
5
+
(1+.09)
0.09

= $1077.79

12

Vb04= (1 000 0.11)

Vb03= (1 000 0.11)

Vb02= (1 000 0.11)

4
1000
(1( 1+0.09 ) )
4
+
(1+.09)
0.09
3
1000
(1( 1+0.09 ) )
+
(1+.09)3
0.09

1000
(1( 1+0.09 )2 )
2
+
(1+.09)
0.09

= $1064.79

= $1050.63

= $1035.18

Vb01= (1 000 0.11)

Vb00= (1 000 0.11)

1
1000
(1( 1+0.09 ) )
+ (1+.09)1
0.09
0
1000
(1( 1+0.09 ) )
+ (1+.09)0
0.09

Capital Gains Yield

Current Yield = Coupon Payment / Price

Bond A
CY 12

= 70 / 856.79

= 8.17%

CY 11

= 70 / 863.90

= 8.10%

CY 10

= 70 / 871.65

= 8.03%

CY 09

= 70 / 880.10

= 7.95%

CY 08

= 70 / 889.30

= 7.87%

CY 07

= 70 / 899.34

= 7.78%

CY 06

= 70 / 910.28

= 7.69%

CY 05

= 70 / 922.21

= 7.59%

CY 04

= 70 / 935.21

= 7.48%

CY 03

= 70 / 949.37

= 7.37%

CY 02

= 70 / 964.82

= 7.26%

CY 01

= 70 / 981.65

= 7.13%

CY 00

= 70 / 1000.00

= 7.00%

= 90 / 1000.00

= 9.00%

= 110 / 856.79

= 9.62%

Bond B
CY 00

Bond C
CY 12

= $1018.35

= $1000.00

CY 11

= 110 / 863.90

= 9.68%

CY 10

= 110 / 871.65

= 9.75%

CY 09

= 110 / 880.10

= 9.82%

CY 08

= 110 / 889.30

= 9.90%

CY 07

= 110 / 899.34

= 9.99%

CY 06

= 110 / 910.28

= 10.09%

CY 05

= 110 / 922.21

= 10.21%

CY 04

= 110 / 935.21

= 10.33%

CY 03

= 110 / 949.37

= 10.47%

CY 02

= 70 / 964.82

= 10.63%

CY 01

= 70 / 981.65

= 10.90%

CY 00

= 70 / 1000.00

= 11.00%

Capital Gains Yield

Capital Gains Yield =

Price
Beginning Price

Bond A
12 years before maturity: (863.9-856.79)/856.79=

0.83%

11 years before maturity:

0.90%

(871.65-863.9)/ 863.9=

10 years before maturity: (880.1-871.65)/ 871.65=

0.97%

9years before maturity:

(889.3-880.1)/ 880.1 =

1.05%

8years before maturity:

(899.34-889.3)/ 889.3=

1.13%

7years before maturity:

(910.28-899.34)/ 899.34=

1.22%

6 years before maturity:

(922.21-910.28)/ 910.28=

1.31%

5 years before maturity:

(935.21-922.21)/ 922.21=

1.41%

4 years before maturity:

(949.37-935.21)/ 935.21=

1.52%

3years before maturity:

(964.82-949.37)/ 949.37=

1.63%

2years before maturity:

(981.65-964.82)/ 964.82=

1.74%

1years before maturity:

(1000-981.65)/ 981.65=

1.87%

Bond B
(1000-1000)/1000 = 0.00% (applies to all the years before maturity)

Bond C
12 years before maturity: (1136.1-1143.21)/ 1143.21=

-0.62%

11 years before maturity:

-0.68%

(1128.35-1136.1)/ 1136.1=

10 years before maturity: (1119.9-1128.35)/ 1128.35=

-0.75%

9 years before maturity:

(1110.7-1119.9)/ 1119.9=

-0.82%

8 years before maturity:

(1100.66-1110.7)/ 1110.7=

-0.90%

7 years before maturity:

(1089.72-1100.66)/ 1100.66=

-0.99%

6 years before maturity:

(1077.79-1089.72)/ 1089.72=

-1.09%

5 years before maturity:

(1064.79-1077.79)/ 1077.79=

-1.21%

4 years before maturity:

(1050.63-1064.79)/ 1064.79=

-1.33%

3 years before maturity:

(1035.18-1050.63)/ 1050.63=

-1.47%

2 years before maturity:

(1018.35-1035.18)/ 1035.18=

-1.63%

1 years before maturity:

(1000-1018.35)/ 1018.35=

-1.83%

Total Return for Each Bond

Expected Total Return
Expected Total Return = Current Yield + Capital Gains Yield

Bond A
12 Years to Maturity =

8.17% + .83% =

9%

11 Years to Maturity =

8.1% + .9% =

9%

10 Years to Maturity =

8.03% + .97% =

9%

9 Years to Maturity =

7.95% + 1.05% =

9%

8 Years to Maturity =

7.87% + 1.13% =

9%

7 Years to Maturity =

7.78% + 1.22% =

9%

6 Years to Maturity =

7.69% + 1.31% =

9%

5 Years to Maturity =

7.59% + 1.41% =

9%

4 Years to Maturity =

7.48% + 1.52% =

9%

3 Years to Maturity =

7.37% + 1.63% =

9%

2 Years to Maturity =

7.26% + 1.74% =

9%

1 Year to Maturity

7.13% + 1.87% =

9%

Bond B
12 Years to Maturity =

9% + 0% =

9%

11 Years to Maturity =

9% + 0% =

9%

10 Years to Maturity =

9% + 0% =

9%

9 Years to Maturity =

9% + 0% =

9%

8 Years to Maturity =

9% + 0% =

9%

7 Years to Maturity =

9% + 0% =

9%

6 Years to Maturity =

9% + 0% =

9%

5 Years to Maturity =

9% + 0% =

9%

4 Years to Maturity =

9% + 0% =

9%

3 Years to Maturity =

9% + 0% =

9%

2 Years to Maturity =

9% + 0% =

9%

1 Years to Maturity =

9% + 0% =

9%

12 Years to Maturity =

9.62% + (-.62%) =

9%

11 Years to Maturity =

9.68% + (-.68%) =

9%

10 Years to Maturity =

9.75% + (-.75%) =

9%

9 Years to Maturity =

9.82% + (-.82%) =

9%

Bond C

8 Years to Maturity =

9.90% + (-.90%) =

9%

7 Years to Maturity =

9.99% + (-.99%) =

9%

6 Years to Maturity =

10.09% + (-1.09%) =

9%

5 Years to Maturity =

10.21% + (-1.21%) =

9%

4 Years to Maturity =

10.33% + (-1.33%) =

9%

3 Years to Maturity =

10.47% + (-1.47%) =

9%

2 Years to Maturity =

10.63% + (-1.63%) =

9%

1 Year to Maturity

10.90% + (-1.90%) =

9%