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...