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BOND Valuation

Caramat, Maria Elena


Cabalteja, Edward
ST-2

The Pennington Corporation issued


a new series of bonds on January 1,
1988. The bond were sold at par
($1000); had a 12% coupon; and
mature in 25 years, on December 31,
2017. Coupon payments are made
semiannually (on June 30 and
December 31)
A. What was the YTM on January 1, 1998?

The original YTM equaled the


coupon rate of 12%
B. What was the price of the bonds on
January 1,1993, 5 years later, assuming
that interest rate had fallen to 10%?
Given
1
FV=$1000 1
(1+)
N = 25 Years BV=INT +
1+
i = 10%
INT = $120
B. What was the price of the bonds on
January 1,1993, 5 years later, assuming
that interest rate had fallen to 10%?
1
1
(1+)
BV=INT +
1+

1
1
(1+.05)50 1000
=60 +
.05 1+.05 50

=1182.559255 or 1182.56
C. Find the current yield, capital gains
yield, and total return on January 1,1993
given the price as determined in the Part
b. Current Yield = Annual Coupon Payment/Price
= $120/$1182.56
= 0.1015 = 10.15%
Capital Gains Yield = Total Yield Current Yield
= 10% - 10.15%
= -15%
Total Return = YTM = 10%
D. On July 1,2011, 6 years before maturity,
Penningtons bonds sold for $916.42. What were the
YTM, the current yield, the capital gains yield, and
the total return that year?
Given
1
FV=$1000 1
(1+)
N = 25 Years BV=INT +
1+
i = 10%
INT = $120
E. Now assume that you plan to purchase an
outstanding Penningtons bond on March 1,
2011, when the going rate of interest given its
risk was 15.5%. How large a check must you
write to complete transaction?
Given
FV=$1000
N = 13
i = 15.5%
INT = $120
E. Now assume that you plan to purchase an
outstanding Penningtons bond on March 1,
2011, when the going rate of interest given its
risk was 15.5%. How large a check must you
write to complete transaction?


1/1/11 7/1/11 1/1/12 7/1/12 1/1/13 12/31/17

3/1/11

N=13 Periods
(6.5years x 2)
E. Now assume that you plan to purchase an
outstanding Penningtons bond on March 1, 2011,
when the going rate of interest given its risk was
15.5%. How large a check must you write to
complete transaction?
1
1
(1+)
BV=INT +
1+

1
1
(1+.0775)13 1000
BV=60 +
.0775 1+.0775 13

=P859.76
E. Now assume that you plan to purchase an
outstanding Penningtons bond on March 1, 2011,
when the going rate of interest given its risk was
15.5%. How large a check must you write to
complete transaction?

Total Value=BV+INT
=P859.60+60

=P919.76
E. Now assume that you plan to purchase an
outstanding Penningtons bond on March 1, 2011,
when the going rate of interest given its risk was
15.5%. How large a check must you write to
complete transaction?
1
1
(1+)
BV=INT +
1+
1
1 4
(1+.0775) 6 919.76
BV=0 + 4
.0775 1+.0775 6

=P875.11