FINA 365 Lecture 5: Week 5 2.7.17

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ambermuskrat630

8 Feb 2017

School

USC, SC, Carolina, South Carolina

Department

Finance

Course

FINA 365

Professor

Robert Hartwig

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Document Summary

Purchase a 30-year, zero-coupon bond with a ytm of 5%. For a face value of 100, the bond will trade for: Bond"s ytm stays at 5%, the price will be higher 5 years later. Rate of return : (29. 53/23. 14)^. 2 -1 = 0. 05. As bond moves closer to maturity, price approaches face value. Effect of time on bond prices is predictable, but unpredictable changes in rates also affect prices. Bonds with different characteristics will respond differently to changes in interest rates. Investors view long term bonds to be riskier than short term bonds. More time for things to happen that will impact the value of the bond. Long term bonds are more sensitive to interest rates than short term. Consider a 10 year coupon bond and a 30 year coupon bond with 10% annual coupons. By what percent will the price of each bond change if its ytm increase from 5 to 6.

Related Questions

Consider three bonds with 5.2% coupon rates, all making annual coupon payments and all selling at a face value of $1,000. The short-term bond has a maturity of 4 years, the intermediate-term bond has maturity 8 years, and the long-term bond has maturity 30 years.

a. What will be the price of each bond if their yields increase to 6.2%? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

4 Years = $

8 Years = $

30 Years Bond price = $

b. What will be the price of each bond if their yields decrease to 4.2%? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

4 Years = $

8 Years = $

30 Years Bond price = $

c. Are long-term bonds more or less affected than short-term bonds by a rise in interest rates?

More affected

Less affected

d. Would you expect long-term bonds to be more or less affected by a fall in interest rates?

More affected

Less affected

Consider three bonds with 6.8% coupon rates, all making annual coupon payments and all selling at a face value of $1,000. The short-term bond has a maturity of 4 years, the intermediate-term bond has maturity 8 years, and the long-term bond has maturity 30 years. a. What will be the price of each bond if their yields increase to 7.8%? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Bond price

at 4 Years = $

at 8 years = $

at 30 years = $

b. What will be the price of each bond if their yields decrease to 5.8%? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Bond price

at 4 Years = $

at 8 years = $

at 30 years = $

c. Are long-term bonds more or less affected than short-term bonds by a rise in interest rates? a. More affected b. Less affected

d. Would you expect long-term bonds to be more or less affected by a fall in interest rates? a. More affected b. Less affected

You want to make a 5-year investment on bonds, and if you buy bonds with longer period of maturity, they will be sold at the prevailing market price at the end of the fifth year. All coupons will be reinvested. You forecast that the rates are going to change after you purchase the bonds. Now you have three bonds with same initial YTM to consider: A. 5-year maturity, 6% coupon paid annually, YTM=9% B. 10-year maturity, 8% coupon paid annually, YTM=9% C. 15-year maturity, 4% coupon paid annually, YTM=9% To pick the best one, you want to calculate the following:

1) What are the current prices of three bonds based on the initial YTM given? [2 points]Current prices of all bonds are shown below Bond 1: n=5; PMT = 6; YTM = 9%; FV = 100; PV=calculate = 88.33 It can be calculated by putting the values in the financial calculator OR by using the PV formule in excel which is =PV(9%,5,6,100) Bond 2 n=10; PMT = 8; YTM = 9%; FV = 100; PV=calculate = 93.58 Bond 3 n=15; PMT = 4; YTM = 9%; FV = 100; PV=calculate = 59.7

2) If the coupon payments are reinvested at the prevailing market rate (7% for the coming 5 years), what are the future values (at the end of the fifth year) of all five coupon payments for three bonds respectively? [3 points]

3) What are the selling prices of three bonds at the end of the fifth year, given that the prevailing market rate is 8% at that time? (For bond A, use its par value as the final selling price, as it will mature in 5 years). [2 points]

4) What are the HPRs for the three bonds? [2 points] 5) Whatâs your recommendation? [1 point]

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FINA 365 Lecture 5: Week 5 2.7.17

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