Chapter 7

Problems 1-35
Input boxes in tan Output boxes in yellow Given data in blue Calculations in red Answers in green NOTE: Some functions used in these spreadsheets may require that the "Analysis ToolPak" or "Solver Add-In" be installed in Excel. To install these, click on the Office button then "Excel Options," "Add-Ins" and select "Go." Check "Analyis ToolPak" and "Solver Add-In," then click "OK."

require that

Chapter 7
Question 1 Input area:

Coupon Required rate of return

10% 8%

Output area:

The yield to maturity is the required rate of return on a bond expressed as a nominal annual interest rate. For noncallable bonds, the yield to maturity and required rate of return are interchangeable terms. Unlike YTM and required return, the coupon rate is a fixed percentage of par over the life of the bond used to set the coupon payment amount. For the example given, the coupon rate on the bond is still 10%, and the YTM is 8%.

Chapter 7
Question 2 Output area:

Price and yield move in opposite directions; if interest rates rise, the price of the bond will fall. This is because fixed coupon payments determined by the fixed coupon rate are not as valuable when interest rates rise--hence, the price of the bond decreases.

Chapter 7
Question 3 Input area:

Settlement date Maturity date Coupon rate Coupons per year Face value Yield to maturity

$

1/1/2009 1/1/2019 7.50% 1 100 8.75%

Output area:

Price

$

918.89

Chapter 7
Question 4 Input area:

Settlement date Maturity date Annual coupon rate Coupons per year Face value (% of par) Bond price (% of par)

1/1/2009 1/1/2018 9% 1 100 93.400

Output area:

Yield to maturity

10.15%

Chapter 7
Question 5 Input area:

Years to maturity Coupons per year Face value Bond price Yield to maturity

$ $

13 1 1,000 1,045 7.50%

Output area:

Present value of final payment Present value of coupon payments Coupon payment Coupon rate

$ $ $

390.56 654.44 80.54 8.05%

Chapter 7
Question 6 Input area:

Settlement date Maturity date Coupon rate Coupons per year Face value Yield to maturity

$

1/1/2009 1/1/2019 6.90% 2 100 7.40%

Output area:

Price

$

965.10

Chapter 7
Question 7 Input area:

Settlement date Maturity date Annual coupon rate Coupons per year Face value (% of par) Bond price (% of par)

1/1/2009 1/1/2019 8.40% 2 100 105

Output area:

Yield to maturity

7.67%

Chapter 7
Question 8 Input area:

Years to maturity Coupons per year Face value Yield to maturity Bond price

$ $

14.5 2 1,000 6.8% 924

Output area:

Present value of final payment Present value of coupon payments Coupon payment Coupon rate

$ $ $

379.23 544.77 29.84 5.97%

Chapter 7
Question 9 Input area:

Treasury rate Inflation rate

7.00% 3.80%

Output area:

Approximate real rate Exact real rate

3.20% 3.08%

Chapter 7
Question 10 Input area:

Real rate Inflation rate

3.00% 4.70%

Output area:

Treasury rate

7.84%

Chapter 7
Question 11 Input area:

Investment return Real return

14% 9%

Output area:

Inflation rate

4.59%

Chapter 7
Question 12 Input area:

Total return Inflation rate

11.40% 4.80%

Output area:

Real return

6.30%

Chapter 7
Question 13 Input area:

Today's ask price Change Coupon rate Bid price

120.25000 0.15625 6.125% 120.21875

Output area:

This is a bond. Previous day price $ 1,204.06

Chapter 7
Question 14 Input area:

Today's ask price Coupon rate Bid price Ask yield

$ $

1,351.8750 7.50% 1,351.5625 4.47%

Output area:

The bond is at a: Current yield YTM Bid-Ask spread

premium 5.549% 4.470% 0.3125

Chapter 7
Question 15 Input area:

Settlement date Maturity date Bond X: Coupon rate Yield to maturity Face value (% of par) # of coupons per year Bond Y: Coupon rate Yield to maturity Face value (% of par) # of coupons per year

01/01/09 01/01/10

8% 6% 100 1

6% 8% 100 1

Output area:

Price of Bond X Price of Bond Y

$ $

1,018.87 981.48

All else held equal, the premium over par value for a premium bond declines as maturity approaches, and the discount from par value for a discount bond declines as maturity approaches. In both cases, the largest percentage price changes occur at the shortest maturity lengths.

Chapter 7
Question 16 Input area:

Bond Sam: Coupon rate Settlement date Maturity date Face value # of coupons per year Bond Dave: Coupon rate Settlement date Maturity date Face value # of coupons per year Change in interest rate

9% 1/1/2009 1/1/2012 1,000 2

9% 1/1/2009 1/1/2029 1,000 2 2%

Output area:

Price of Bond Sam Price of Bond Dave % change in Bond Sam % change in Bond Dave

$ $

950.04 839.54 -5.00% -16.05%

All else same, the longer the maturity of a bond, the greater is its price sensitivity to changes in interest rates.

Chapter 7
Question 17 Input area:

Bond J: Coupon rate Initial yield to maturity Settlement date Maturity date Face value # of coupons per year Bond K: Coupon rate Initial yield to maturity Settlement date Maturity date Face value # of coupons per year Change in interest rate

4% 8% 1/1/2007 1/1/2016 1,000 2

12% 8% 1/1/2007 1/1/2016 1,000 2 2%

Output area:

Initial price of Bond J Price after change Initial price of Bond K Price after change % change in Bond J % change in Bond K

$

746.81 649.31 1,253.19 1,116.90 -13.06% -10.88%

$

All else same, the lower the coupon rate of the bond, the greater is its price sensitivity to changes in interest rates.

Chapter 7
Question 18 Input area:

Settlement date Maturity date Annual coupon rate Coupons per year Face value (% of par) Bond price (% of par)

1/1/2009 1/1/2018 9.2% 2 100 106.80

Output area:

Current yield Yield to maturity Effective annual rate

8.61% 8.12% 8.29%

Chapter 7
Question 19 Input area:

Settlement date Maturity date Annual coupon rate Coupons per year Face value (% of par) Bond price (% of par)

1/1/2009 1/1/2029 8% 2 100 93.0

Output area:

Yield to maturity

8.75%

Chapter 7
Question 20 Input area:

Dirty price Coupon rate Months to next coupon Par value

$

$

968.00 7.4% 4 1,000

Output area:

Accrued interest Clean price

$ $

12.33 955.67

Chapter 7
Question 21 Input area:

Clean price Coupon rate Months to next coupon Par value

$

$

1,073.00 6.8% 2 1,000

Output area:

Accrued interest Invoice price

$ $

22.67 1,095.67

Chapter 7
Question 22 Input area:

Annual coupon rate Yield to maturity Current yield Face value

$

8.00% 7.20% 7.55% 1,000

Output area:

Current price Years to maturity

$ 1,059.60 11.06

Chapter 7
Question 23 Input area:

Coupon rate Date Maturity Last price Face value

$

7.20% 4/15/2009 4/15/2023 108.960 1,000

Output area:

Yield to maturity Current yield

6.23% 6.61%

Chapter 7
Question 24 Output area:

a) Bond price is the present value term when valuing the cash flows from a bond; YTM is the interest rate used in valuing the cash flows from a bond. The bond price and YTM are inversely related. If the YTM increases, the bond price decreases and if the YTM decreases, the bond price increases. b) If the coupon rate is higher than the required return on a bond, the bond will sell at a premium, since it provides periodic income in the form of coupon payments in excess of that required by investors on other similar bonds. If the coupon rate is lower than the required return on a bond, the bond will sell at a discount, since it provides insufficient coupon payments compared to that required by investors on the similar bonds. For premium bonds, the coupon rate exceeds the YTM; for discount bonds, the YTM exceeds the coupon rate, and for bonds selling at par, the YTM is equal to the coupon rate. c) Current yield is defined as the annual coupon payment divided by the current bond price. For premium bonds, the current yield exceeds the YTM, for discount bonds the current yield is less thatn the YTM, and for bonds selling at par value, the current yield is equal to the YTM. In all cases, the current yield plus the expected one-period capital gains yield of the bond must be equal to the YTM.

Chapter 7
Question 25 Input area:

Years to maturity Required return Face value

$

25 9% 1,000

Output area:

a) Price at issuance b) Price in one year First year deduction Price one year before maturity Last year deduction c) Total interest Annual interest deduction

$ $ $ $ $ $ $

110.71 120.90 10.19 915.73 84.27 889.29 35.57

d) The company will prefer the straight-line method when allowed because the valuable interest deductions occur earlier in the life of a bond.

Chapter 7
Question 26 Input area:

Years to maturity Required return Amount needed Face value Coupon rate Tax rate

$ $

30 8% 30,000,000 1,000 8% 35%

Output area:

a) Price of coupon bond # of coupon bonds needed Price of zero coupon bond # of zeroes needed b) Repayment of coupon bonds Repayment of zeroes c) Year 1 interest payments: Coupon bond Zero price in one year Year one interest per bond Zero coupon bond

$

1,000 30,000 95.06 315,589 32,400,000

$

$

$ 315,588,822

$ $ $

1,560,000 102.82 7.76

Cash outflow

$ (856,800.00)

Cash inflow

During the life of a bond, the zero generates cash inflows to the firm in the form of the interest tax shield of debt.

Chapter 7
Question 27 Output area:

Coupon rate

10%

Output area:

The maturity is indeterminate. A bond selling at par can have any length of maturity.

Chapter 7
Question 28 Input area:

Future value Number of years Nominal rate Inflation rate

$ 1,500,000 40 11.00% 3.80%

Output area:

Real rate Annual deposit $

6.94% 7,637.76

Chapter 7
Question 29 Input area:

Bond P: Coupon rate Yield to maturity Settlement date Maturity date Face value # of coupons per year Bond D: Coupon rate Yield to maturity Settlement date Maturity date Face value # of coupons per year Date one year from now

$

12% 9% 1/1/2009 1/1/2014 1,000 1

$

6% 9% 1/1/2009 1/1/2014 1,000 1 1/1/2010

Output area:

Current price of Bond P Price in 1 year Current price of Bond D Price in 1 year Current yield of Bond P Capital gains yield of Bond P Current yield of Bond D Capital gains yield of Bond D

$ $ $ $

1,116.69 1,097.19 883.31 902.81 10.75% -1.75% 6.79% 2.21%

All else held constant, premium bonds pay high

current income while having price depreciation as maturity nears; discount bonds do not pay high current income but have price appreciation as maturity nears. For either bond, the total return, is still 9%, but this return is distributed differently between current income and capital gains.

Chapter 7
Question 30 Input area:

Settlement date Maturity date Coupon rate Price of bond Face value Coupons per year Date sold Change in interest rate

$

1/1/2009 1/1/2019 7% 1,060 1,000 1 1/1/2011 -1%

Output area:

a) Yield to maturity

6.18%

This is the rate of return you expect to earn on your investment when you purchase the bond. b) Price of bond when sold Holding period yield $ 1,116.92 9.17%

The realized HPY is greater than the expected YTM when the bond was bought because interest rates have dropped by 1%; bond prices rise when yields fall.

Chapter 7
Question 31 Input area:

Bond M: Years to maturity Years to first round of interest payments Years to second round Face value Amount of first round interest payment Amount of second round Bond N: Years to maturity Face value Required return on both bonds $

20 6 14 20,000 1,100 1,400

$

20 20,000 7%

Output area:

Bond M: a) Present value of face value Present value of first round Present value of second round Current price of Bond M b) Current price of Bond N

$

$ $

5,051.45 8,804 5,163.27 19,018.78 5,051.45

Chapter 7
Question 32 Input area:

Coupon rate of Bond 1 Coupon rate of Bond 2 Coupon rate of Bond 3 Price of Bond 1 Price of Bond 2 Price of Bond 3 Par value

6.50% 8.25% 12.00% $ 106.37500 $ 103.50000 $ 134.96875 $ 1,000

Output area:

Bond 2 coupon = Bond 1 coupon X r + Bond 3 coupon X (1 - r) r = (Bond 2 coupon - Bond 3 coupon) / (Bond 3 coupon - Bond 1 coupon) = Implied value of callable bond Implied value of call option $ $ 115.47 119.73

0.68182

Chapter 7
Question 34 Input area:

Real price of roses Number of years Discount rate Inflation rate

$

5 30 8.40% 3.70%

Output area:

Real rate (EAR) Real rate (APR) Weekly rate Present value

4.53% 4.43% 0.09% $4,312.13

Chapter 7
Question 35 Input area:

Years for savings Monthly stock deposit Stock account EAR Monthly bond deposit Bond account EAR Inflation rate Return in retirement (EAR) Years for withdrawals

$ $

30 900 11% 450 7% 4% 9% 25

Output area:

Stock account real rate (EAR) Stock account real rate (APR) Monthly stock account return FV of stock account (real dollars) Bond account real rate (EAR) Bond account real rate (APR) Monthly bond account return FV of bond account (real dollars) Total account value at retirement Retirement EAR Retirement APR Monthly rate in retirement Present value Lat withdrawal in nominal terms

6.73% 6.53% 0.54% $ 1,001,704.05 2.88% 2.85% 0.24% 255,475.17

$

$ 1,257,179.22 4.81% 4.70% 0.39% $ $ 7,134.82 61,690.29

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