PROBLEM SET # 8

Name – Ayushi Saxena

Roll No. – PGP/24/442

Concept Questions (Ind_PS_BONDS_A2)

Question 2

The treasury bonds have a generally lower yield as compared to the BB corporate bonds, and thus are
considered to be safer. As the interest risk is inversely proportional to the yield, the interest risk
involved in treasury bonds is higher than that in the BB corporate bonds.

Question 12

If there is no transparency in the bond market, then the bond investors would not be able to know the
last traded prices and consequently would not be able to make correct investment decisions related to
the bonds.

Questions & Problems (Ind_PS_BONDS_A2)

Question 2

Given,

Par Value $ 1,000

years (semi-
Time to maturity 20 annually)
Number of periods 40
Coupon rate 0.07
Semi-annual payment $ 35.0

  YTM Price of coupons Excel formula used Price of par value Excel formula used Total Price
( =1000/POWER(1.035,40)
a. 0.07 $ 747.43 ( = 35*PV(0.035,40,-1) ) $ 252.57 ) $ 1,000.00
b ( =1000/POWER(1.045,40)
. 0.09 $ 644.06 ( = 35*PV(0.045,40,-1) ) $ 171.93 ) $ 815.98
( =1000/POWER(1.025,40)
c. 0.05 $ 878.60 ( = 35*PV(0.025,40,-1) ) $ 372.43 ) $ 1,251.03

Question 22

Par Value $ 1,000.00

Invoice Price $ 950.00
Coupon rate 0.052 (semi-annually)
Time for next payment 2 months
Semi-annual coupon $ 26.00 ( =1000*0.052*0.5 )
Accrued interest $ 17.33 ( =(4*26)/6 )
 Clean Price $ 932.67 ( =950-17.33 )

Question 32

If the bond is a callable bond, it can be bought at a negative yield to maturity if the yield to call is
positive. Yield to maturity involves all the payments until the maturity date whereas yield to call is the
price received on the bond if it is paid off earlier than the maturity date.

Questions & Problems (Ind_PS_BONDS_A3)

Question 9

Face Value $ 1,000.00

Call Time 1 year
Coupon rate 0.1 (annual)
Call Price $ 1,150.00
Annual Payment $ 100.00 ( =1000*0.1 )

After 1 year, if rate is 12%

Price after 1 year = 100/0.12 = $ 833.33

After 1 year, if rate is 7%

Price after 1 year = 100/0.07 = $ 1,428.57

As the price after 1 year for 7% is greater than the call price, the bond will be called at this rate.
As the price after 1 year for 12% is lower than the call price, the bond will not be called at this rate.

Given,
Probability (at 12%) = 0.6
Probability (at 7%) = 0.4
Expected Price after 1 year = 0.6(833.33) + 0.4(1150) = $ 960.00
Expected price at present = 960/1.1 + 100/1.1 = $ 963.64