Assignment (100 points)
Learning Outcome: Fundamentals of Bonds
- Describe following for Bonds : ( 10 points)
- coupon rate
- current yield
- Yield to maturity
- Which ones of the above rates/yield can change over the life of the bond and if yes, why? ( 10 points)
- Research and find a bond for large blue chip company like McDonald, Intel, GE or any other from Dow Jones 30 list. Provide following ( and list source) ( 20 points)
- Bond information : Company, rating
- Maturity date
- Current price
- Coupon rate %
- Current yield %
- Yield to Maturity (YTM)
- if overall interest rates in the economy start to go up, what will happen to the price of the bonds? Explain? ( 10 points)
- What is a callable bond and in what type of interest environment would the lenders exercise the call option on the bond and why? ( 10 points)
EXCEL EXCERCISES:
- Calculate Bond price : ( 10 points)
- Par Value : $ 1000
- Coupon rate : 3 % ( paid annually)
- Yield to maturity rate (YTM) : 5 %
- Time to maturity 10 years
- Calculate Bond price : ( 10 points)
- In reference to problem above, If borrower (corporation) has financial issues and the company gets downgraded by rating agencies (like Moody’s or Fitch) and the YTM goes up to 6 %. Calculate the price of the bond with this higher risk situation ( hence higher YTM)
- Calculate expected rate ( Yield to maturity) : ( 10 points)
- Bond Price : 900
- N= 10 years
- Coupon rate : 6 % ( Annual payments)
- Par Value : 1000
- YTM: ? ( Hint Use “RATE” from Excel financial formulas)
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