Answer Sheet for Fixed Income Valuation Assignment

Name: Neelam Makhnejia Grade ______

1A. 4.75% YTM if priced at face value of $100

= [[.0475 + (100-100)/10] / (100+100/2)]*100

4.874% YTM if priced at 99% of face value of $100

= [[.0475 + (100-99)/10] / (100+99/2)]*100

4.627% YTM if issued at 101% of face value of $100

= [[.0475 + (100-101)/10] / (100+101/2)]*100

1B. $915.86M Price if YTM = 3.00%

=(47.5/.0475)*(1-(1/((1.0475)^2)))
+ ((30/.03)*(1-(1/((1.03)^2))))/(1.03^2)
+1B/(1.0475)^10

2A. $1040.55 Price of Bond A

= (45/.04)*(1-(1/((1.04)^10))) + 1000/(1.04)^10

$1000 Price of Bond B

= (40/.04)*(1-(1/((1.04)^20))) + 1000/(1.04)^20

$456.39 Price of Bond C

 = 1000/(1.0816)^10

B. 8.15% YTM on Nationaliste Eurobond

= [[.08 + (1000-990)/10] / (1000+990/2)]*100

In which of the bonds should Ms. Alumm invest? Why?

Ms. Alumm should invest in the Patriot’s bonds because at the same level of risk, Patriot’s
bonds have a higher YTM rate (8.16%) compared to the 8.15% YTM on the Nationaliste
Eurobond.
3A. $228,213.64 Affordable mortgage value

= (25,000*.09)*(1-(1/((1.09)^20)))

$271,786.36 Total interest

=20*25,000 – 228,213.64

$20,538.90 First year interest paid

= 228,213.64 * (.09)

$4,461.10 First year principal paid

=25,000 – 20,538.90

$2,064.22 Amount of interest in 20th payment

=(25,000/1.09) – 25,000

$22,935.78 Amount of principal in 20th payment

=25,000 – 2,064.22

3B. $273,301.84 Affordable mortgage value with growing income

= (25,000*.09)*(1-(1/((1.09)^5)))
+ (30,000*.09)*(1-(1/((1.09)^5)))/(1.09^5)
+ (35,000*.09)*(1-(1/((1.09)^5))) /(1.09^10)
+ (40,000*.09)*(1-(1/((1.09)^5)))/ /(1.09^15)

4A. 10% Effective YTM on Pru-Johntower bond

=[1 + (.10/1)]1 - 1

10.16% Effective YTM on Tom Paine bond

=[1 + (.0972/12)]12 - 1

4B. $41,772,481.69 Required future payment on Pru-Johntower bond

= (1.10)*(1-(1/((1.10)^15))) + 10000000/(1.10)^15

$42,693,219.75 Required future payment on Tom Pain bond

 = (1.1016)*(1-(1/((1.1016)^15))) + 10000000/(1.1016)^15
4C. Explanation of higher yield on coupon bonds versus zero coupon bonds
An insurance company might require slightly higher annual yield on coupon bonds
compared to bonds with zero coupons because that money is coming back to the investor
and that money can then be reinvested. With zero coupon bonds, the money will be
returned in a lump sum and the bond holder will then be allowed to make another
investment.

5A. 4.33% Effective after-tax cost of debt (expressed as a percentage)

=[1 + (.06625/1)]1 – 1 * (1-.35)

5B. ______________ Annual tax savings

______________ Present value of annual tax savings

6A. Why do the IRBs have a lower effective yield?

IRB’s have a lower effective yield because interest and principal paid on debt was repaid
by Weyerhauser. There is also a tax break associated with the IRB’s which allow for a
more money for Weyerhauser.

6B. _____________ Present value of tax savings