Data

FV = Face Value $1,000,000.00

P = Price today $952,380.95
Term 1 year
Risk-free return = r1 = YTM1 = 5.000000% r=( FV/P-1)
5.0000003%
Data: 100
Zero Coupon Bond Name Z1 Z2 Z3 Z4
Term, n (years) 1 2 3 4
PV of $100 par value zero- $95.2381 $90.3584 $85.4040 $79.9611
coupon bond
Calculate the YTMs (formula) 5.000000% 5.200000% 5.400000% 5.750000%
Calculate the YTMs (RATE) 5.000000% 5.200000% 5.400000% 5.750000%
 Z5
5

$74.7258

6.000000%
6.000000%
Data
Face value 1000
Coupon rate 9%
Coupons per year 2
Maturity 20 years
Calculations: NPER = 40.00
Coupon= $45.00
YTM rate ? Price
5% 2.50% $1,502.06
9% 4.50% $1,000.00
13% 6.50% $717.09
PV
Data
Face value 1000
Coupon rate 5.00%
Coupons per year 2
Price $957.35
Coupon $25.00
Number of periods 20.00
RATE 2.780899%
YTM 5.561799%

Data: Term (years) 30 Coupon Rate 6% Coupons per year

Prices (see column) Face Value 1000
Coupon = $30.00 NPER = 60.00

Price RATE function APR with semiannual compounding

$1,348.00 1.999094% 3.998189%

$1,155.00 2.498674% 4.997348%
$1,000.00 3.000000% 6.000000%
$875.00 3.501232% 7.002464%
$774.00 3.998719% 7.997439%

Data: Term (years) 30 Coupon Rate 6% Coupons per year

YTM (see column) Face Value 1000
Coupon = $30.00 NPER = 60.00
 Effective rate
YTM Price
per six months

3.00% 1.500% $1,590.70 Premium

4.50% 2.250% $1,245.62 Premium
6.00% 3.000% $1,000.00 At par
7.50% 3.750% $821.97 Discount
9.00% 4.500% $690.43 Discount
2

2
Data: Bond's Term 30 years
Face Value $100.00
Coupon Rate 10% paid annually Coupen=
YTM 5.00% EAR
Coupon Amount: Work through the table below systematically
simple application of PV Timing adjustment
Coupons Remaining
Description function based on number (time to move PV
Already Paid Coupons
of remaining coupons forward)
at time of issuance 0 30 $176.86 0
just before 1st coupon 0 30 $176.86 1
just after 1st coupon 1 29 $175.71 0
just before 2nd coupon 1 29 $175.71 1
just after 2nd coupon 2 28 $174.49 0
 FIXED YTM

$10.00

Price = adjusted PV based on time

Pattern Observed
around coupon

$176.86 at time of issuance

$185.71 just before 1st coupon 176.86 to 185.71 price goes up as we get closer to same stream of cash flow
$175.71 just after 1st coupon price drops by the amount of the coupns as 1 coupon us gone.
$184.49 just before 2nd coupon Prie goes back up as we get closer to new stream of cash flows (29 periods).
$174.49 just after 2nd coupon price drops by the amount of the coupns as another coupon us gone.
r to same stream of cash flows (30 periods.
oupon us gone.
m of cash flows (29 periods).
other coupon us gone.
Data: Calculations:

YTM to start = 3.00% YTMs are EARs:

Face Value = $1,000.00

Bond Term to Maturity (years) Coupon Rate Annual Coupons

A 2 10% $100.00
B 20 10% $100.00
Y 2 0 $0.00
Z 20 0 $0.00

Data: Bond's Term 100 years

Face Value $300,000,000.00
YTM 4.670% EAR
Calculations Coupon Rate 4.67% paid annually
Coupon $14,010,000.00 paid annually
New YTM New Price % Change in Price
3.67% $379,519,815.16 26.506605%
6.67% $210,186,164.90 -29.937945%
 % change in price
=(New/old) -1
YTM used YTM used OR
3.00% 4.00% = (New-Old)/Old
Price at
Price at
Starting YTM % Change in Price
Starting YTM
+ 1%
$1,133.94 $1,113.17 -1.8323%
$2,041.42 $1,815.42 -11.0709%
$942.60 $924.56 -1.9138%
$553.68 $456.39 -17.5714%

Know this because the bond was sold at par value COUPON RATE = PAID ANNUALLY
Data:
Zero Coupon Bond Name Z1 Z2 Z3 Z4 Z5
Term, n (years) 1 2 3 4 5

YTMn
or 5% 5.20% 5.40% 5.75% 6%
Spot Rate rn

PV of $100 par value $95.2381 $90.3584 $85.4040 $79.9611 $74.7258

zero-coupon bond

Cash flows of a 3-year bond with face value of $1,000, a coupon rate of 10%, and annual coupons.
Year 1 2 3
Cash flow $100.00 $100.00 $1,100.00 these are the payoffs of the $1000 face value bond with 1

Replication of Cash Flows Using Replicating Portfolio of Zero-Coupon Bonds

Year 1 2 3
1 of Z1 $100.00
1 of Z2 $100.00
11 of Z3 $1,100.00
Using the observable prices from the above table we have …
Prices of 1 of Z1 1 of Z2 11 of Z3
$95.24 $90.36 $939.44
Total Price of Replicating Portfolio of Zero-Coupon Bonds $1,125.04 so, this I the price of the bond we replicated
This must be the price of the 3-year bond with face value of $1,000, a coupon rate of 10%, and annual coupons.
What is the YTM of this 3-year bond?
Use Excel's Rate function to solve for the one rate that equates the PV of the bond's cash flows to its price we just determined.
YTM = 5.376021% (note this is an EAR)

Cash flows of a 4-year bond with a face value of $1,000, a coupon rate of 7%, and annual coupons
Year 1 2 3 4
Cash flow $70.00 $70.00 $70.00 $1,070.00 the bond cash flows
Spot rates for discounting using 5.00% 5.20% 5.40% 5.75%
observable rates:
PVs of cash flows using relevant
spot rates: $66.67 $63.25 $59.78 $855.58
Sum of the PVs of the individual cash flows calculated above: $1,045.28 this must be the bond's price
What is the YTM of this 4-year bond?
Use Excel's Rate function to solve for the one rate that equates the PV of the bond's cash flows to its price we just determined.
YTM = 5.702059% (note this is an EAR)
offs of the $1000 face value bond with 10% coupon rate

of the bond we replicated

ual coupons.

s price we just determined.

e bond cash flows

s price we just determined.

Data Face Value $1,000.00
Term 1 year
Discount Rate Expected Cash Flow Price Using PV function
4.00% $1,000.00 $961.54 $961.54

Data Face Value $1,000.00

Term 1 year
Discount Rate Expected Cash Flow Price Using PV function
4.00% $900.00 $865.38 $865.38

Data Face Value $1,000.00

YTM = 15.55556% NOTE: this is much higher than this bond's expected return of 4%

Data Face Value $1,000.00

Probability of Default 0.50
Payoff on Default $900.00
Term 1 year
Risk-free Rate 4.00%
Risk Premium 1.10%
Discount Rate Expected Cash Flow Price YTM
5.10% $950.00 $903.90 10.631579%

0.106315789473684 §A bond’s expe

Discount rate 5.10%
nd's expected return of 4%

§A bond’s expected return will be less than the yield to

han the yield to maturity if there is a risk of default.
default.
 1+n-t fn = [(1

1+2f5 1.0653671
so 2f5 6.5367%

Data:

Term (years) 1 2 3 4 5

YTM (rn) 5.00% 5.20% 5.40% 5.75% 6%

Calculations: 1+f3 = 1.05801141
So, f3 = 5.801141%

Data: f2 = 5.40038095%
Calculations: Geometric Average of r1 and f2 = 5.09995%

r2 = 5.099952%
Data: r3 = 5.40%
r4 = 5.75%
Amount to invest: $50,000.00
Calculations
Choose for Q.3
1. Future value in 3 years using r3 = $58,545.27 $58,545.27
2. needed future 1-year spot rate (3 years from now) = 6.806983% ?

3. Option Carlton chooses if he has E[ 3r4] = 6.806983% is option ….. A A

4. To choose option B, Carlton must have his expectation such that … B
E[3r4] < 6.806983% this is f4 2
?
>
=
<
4
Choose for Q.4
 f = [(1+rn)n / (1+rn-t)n-t]1/t
n-t n
 For Q2: Carlton lends $50,000 now for 4 years at 7.75%
in 4 years, if held to maturity, he would get back
FV in 4 years using r4 $62,530.44 $62,530.44
need for the 1 year spot rate in 3 yeaers to discount
the $62,530 back 1 year to get the same $ as in Q1

$58,545.27 /(1+3r4) $62,530.44

Choose for Q.3
that rate has to be 6.80698%
6.8070% used forward rate here it's the same
te here it's the same