Question

- Suppose there is a 2-year bond that pays an interest payment of
$70 at the end of the first year and then pays another interest
payment of $70 plus the $1,000 face value at the end of year two
when it matures. The interest payment is known as a “coupon”
payment, and therefore, bonds that pay interest are known as
“coupon bonds”. Since this bond pays its interest payments once per
year, it is known as a 7% annual coupon bond. Notice that 7% of the
$1,000 face value of the bond is equal to the $70 coupon
payment.

- The yield to maturity of a bond is the interest rate that
equates the present discounted value of a bond’s cash flows to its
price. If this bond is selling for $950, find the yield to maturity
of this bond algebraically.

**Answer to a: YTM = 9.88%** **Set up the cash flows for this bond in***Excel*. Then use Solver to check your answer to part b making sure to keep the Solver solution before you save and submit the Excel file. Please submit your Excel spreadsheet that has your Solver solution in a worksheet labeled “Q3”.

Excel Note: Recall that Solver is an “Add-In” that may not be loaded into Excel on your computer.

- The yield to maturity of a bond is the interest rate that
equates the present discounted value of a bond’s cash flows to its
price. If this bond is selling for $950, find the yield to maturity
of this bond algebraically.

Please answer only **question b** and please show
the formulas used in *Excel*.

Answer #1

Step 1- Build a excel template as shown belowsStep 2- Enter the cash flows, for year 1 it is same as Coupon amount and for year two it is Coupon+ Maturity value

SStep 3- Calculate the DCF using the formula DCF for year 1 = Cash flow for year 1/(1+YTM)^1 and for 2nd year ash flow for year 2/(1+YTM)^2.

Step 4- PV equals to the total cash inflows in year 1 and year 2

Step 5- Calculate the PV using PV formula as shown below in the formula bar

Step 6- Validate cash outflow(price of the bond) is equal to total cash inflows

Step 7- You can also calculate the YTM by using the Rate formula in excel as shown in the formula bar

Step 8- Finally add solver to excel(go to file then option then add-ins then in Manage go to Excel Add-ins then tick Solver Add ins and click ok. Solver is available under Data tab under Analyze part. Click on the solver- under set objectives- add PV of the bond(next to the PV formula), in the "To" option, put -950(Cash outflow) and in "By Changing Variable Cells:" add YTM of the bond(Next to the Yeild). and then click solve

Now you can see, if you change the Price by any amount, your yield will change, PV will change and also cash inflow will change. But cash inflow will be always equal to the cash outflow.

That means value of a bond is always equal to the sum of discounted future cash inflows of the bond.

A 16-year, 4.5% coupon bond pays interest semiannually. The bond
has a face value of $1,000. What is the percentage change in the
price of this bond if the market yield to maturity rises to 5.7%
from the current rate of 5.5%?
PLEASE TRY TO BE A SIMPLE AS POSSIBLE, preferably using
excel!

A 12-year, 5% coupon bond pays interest annually. The bond has a
face value of $1,000 and selling for $916. What is the yield to
maturity of this bond?

a) What is the value of a 6-year, 7.7% coupon, $1,000 face value
bond that pays quarterly coupons, if its yield to maturity is 2.8%?
Round to the nearest cent.
b) You own a 17-year, 3.8% annual coupon bond with $1,000 face
value. If the yield to maturity is 8.5%, what percentage of the
bond's value comes from the present value of coupon payments?
Answer in percent, rounded to one decimal place.
c) Your company is undertaking a new investment...

What is the price of a 4-year, 8% coupon rate, $1,000 face
value bond that pays interest quarterly if the yield to maturity on
similar bonds is 11.9%?

What is the price of a
5-year,
8.2%
coupon rate,
$1,000
face value bond that pays interest annually if the yield to
maturity on similar bonds is
7.2%?

What is the price of a 3-year, 7.9% coupon rate, $1,000 face
value bond that pays interest quarterly if the yield to maturity on
similar bonds is
12.1%?

What is the price of a 3-year, 7.9% coupon rate, $1,000 face
value bond that pays interest quarterly if the yield to maturity on
similar bonds is 11.9%?

6. Consider a 10 year bond with face value $1,000 that pays a
6.8% coupon semi-annually and has a yield-to-maturity of 8.4%. What
is the approximate percentage change in the price of bond if
interest rates in the economy are expected to decrease by 0.60% per
year? Submit your answer as a percentage and round to two decimal
places. (Hint: What is the expected price of the bond before and
after the change in interest rates?)

Consider a 12-year bond with face value $1,000 that pays an 8.6%
coupon semi-annually and has a yield-to-maturity of 7.7%. What is
the approximate percentage change in the price of bond if interest
rates in the economy are expected to decrease by 0.60% per year?
Submit your answer as a percentage and round to two decimal places.
(Hint: What is the expected price of the bond before and after the
change in interest rates?)

A 10-year bond pays interest of $27.10 semiannually, has a
face value of $1,000, and is selling for $786.13.What are its
annual coupon rate and yield tomaturity?

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