Randy Marzeind

29115238
MBA Class PT. CPI Batch-4
Answer Sheet Case Note on Bond Valuation and Returns
1. Derivation of bond pricing formula
n

P=
t =1

C
M
+
t
(1+ y ) (1+ y )n

C
C
M
P=

+
t
t
n
(1+ y)
t =1 (1+ y )
t =n+1 ( 1+ y )

C
1
C
M
P=

+
t
n
n
( 1+ y ) t =n +1 (1+ y ) (1+ y )n
t =1 (1+ y )

P=

P=

P=

P=

(1+Cy )t
t=1

C
1+ y

C
1+ y

)(

1
M
+
n
n
( 1+ y ) (1+ y)

(1+1 y)t

t =0

)(

1
M
+
n
n
( 1+ y ) (1+ y )

1
1
1+ y

)(

1
M
+
n
( 1+ y ) (1+ y )n

C
1
1+ y 1+ y1
1+ y

)(

1
M
+
n
( 1+ y ) (1+ y )n

P=

C 1+ y
1
M
1
+
n
1+ y y
( 1+ y ) (1+ y )n

P=

C
1
M
1
+
n
y
( 1+ y ) (1+ y )n

Randy Marzeind
29115238
MBA Class PT. CPI Batch-4

P=C

1
( 1+ y )n
M
+
y
(1+ y )n

2. M = $ 1,000
n = 7 years
C = 5%
y = 12%

P=C

P=$ 50

1
( 1+ y )n
M
+
n
y
(1+ y )

1
( 1.12 )7 $ 1,000
+
0.12
(1.12)7

P=$ 228.19+ $ 452.35

= $ 680.54

The bond price is $ 680.54

3. A. If the bond price goes up 3% then the bond value become $ 680.54 x
1.03 = $ 700.95
P = $ 700.95

$ 700.95=$ 50

1
( 1+ y )7 $ 1,000
+
=11.44
y
(1+ y )7

So if the bond value increases 3% the annual yield will decreases from 12%
into 11.44%
B. If the bond price goes down 3% then the bond value become $ 680.54 x
0.97 = $ 660.12

Randy Marzeind
29115238
MBA Class PT. CPI Batch-4
P = $ 660.12

$ 660.12=$ 50

1
( 1+ y )7 $ 1,000
+
=12.59
y
(1+ y )7

So if the bond value decreases 3% the annual yield will increases from 12%
into 12.59%

4. Annual yield = 12%

Annualized one-month yield
12
m

12
n

(1+ y m ) =(1+ y n )
12

12 =(1+ y n ) 1
0.9499
With the same bond price if we calculate compounding convention to
annualized one-month yield become 0.9499%
Annualized nine-month yield
12
m

12
n

(1+ y m ) =(1+ y n )
12

12 =(1+ y n ) 9
8.89
With the same bond price if we calculate compounding convention to
annualized nine-month yield become 8.89%

Randy Marzeind
29115238
MBA Class PT. CPI Batch-4

5. Two-months yield 1.1%

12
m

12
n

(1+ y m ) =(1+ y n )

(1.011)6=(1+ y n)12
6.8
Annual yield will be 6.8%