- Submitted By: jstump30
- Date Submitted: 12/03/2010 11:27 AM
- Category: Business
- Words: 476
- Page: 2
- Views: 315

FIN 301: Principles of Finance

Fall 2010

Assignment 2

Valuation of Financial Securities

Report By: Jonathan Stump

BOND VALUATION

Bond A Bond B Bond C

-7% annual coupon rate -9% annual coupon rate -11% annual coupon rate

-Matures in 12 years -Matures in 12 years -Matures in 12 years

-$1,000 face value -$1,000 face value -$1,000 face value

a. Calculate price of each bond and indicate whether each bond is a premium or discount or at par.

Bond A

PMT - 70

N - 12

I - 9%

FV - $1,000

PV - $856.78 = Trading at Discount

Bond B

PMT -90

N - 12

I -9%

FV - $1,000

PV - $1,000 = Trading at Par Value

Bond C

PMT – 110

N – 12

I – 9%

FV - $1,000

PV - $1,143.21 = Trading at Premium

b. Calculate the current yield for each of the three bonds.

Bond A = 70/856.78 = .0817 …... 8.17%

Bond B = 90/1000 = .0900 …….. 9%

Bond C = 110/1143.21 = .0962 ………. 9.62%

c. What will be the price of each bond 1 year from now?

Bond A

N – 11

I – 9%

PMT – 70

FV – $1000

PV - $863.89

Bond B

N – 11

I - 9%

PMT – 90

FV - $1000

PV - $1000

Bond C

N – 11

I – 9%

PMT – 110

FV - $1000

PV - $1136.10

What is Capital Gains Yield for each bond?

Bond A

(863.89 – 856.78)/856.78 = .0083…. .83%

Bond B

(1000-1000)/1000 = 0%

Bond C

(1136.10–1143.21)/1143.21 = -.0062…. -.62%

What is the Expected Total Return for each bond?

Bond A

8.17% + .83% = 9%

Bond B

9% + 0% = 9%

Bond C

9.62% + (-.62%) = 9%

d. Mr.Clark is considering another bond, Bond D. It has a 8% semiannual coupon and a $100 face value. Bond D is scheduled to mature in 9 years and has a price of $1,150. It is also callable in 5 years at a price of $1,040.

1.What is the bond’s nominal YTM?

FV - $1,000

N – 18

PMT – 40

PV – ($1,150)

I = 2.9170 x 2 = 5.8340%

2. What is the bond’s nominal YTC?

FV – $1,140

N – 10

PMT – 40

PV – ($1,150)

I – 2.6295 x 2 = 5.2590...