Assignment Week 3

Jaime Lievano (2205932)

University Canada West
FNCE 623 – Financial Management
Prof. Dr. Sujatha Selvaraj
January 30th, 2023

3. Bond Prices (L02) Malahat Inc. has 7.5% coupon bonds on the market that have ten years left to
maturity. The bonds make annual payments. If the YTM on these bonds is 8.75%, what is the current
bond price?

Compounding Bond Price

Coupon
7.5% (Coupon Rate)
Rate
Par $
(Repaid at the end)
Value 1,000.00
$
Discount Bond
857.14
Period 1
$
Coupon Value (Regular interest Payment)
75.00
Years of Maturity 10
Yield
8.75%
Rate
$
B
918.89
1 - 1
1
0

$ $
Bond Price = x ( 1.0875 ) +
75.00 1,000.00
1
0

0.088 1.088
$ 0.43222 $
Bond Price = x 1 - +
75.00 2 1,000.00
0.088 2.314
$
Bond Price =
918.89

4. Bond Yields (L02) Leechtown Co. has 4.3% coupon bonds on the market with 18 years left to
maturity The bonds make annual payments. If the bond currently sells for $870, what is its YTM?
Yield Calculator (Trial and Error)

Coupon
4.3% (Coupon Rate)
Rate
Par $
(Repaid at the end)
Value 1,000.00
$
Discount Bond
788.75
Period 1
$
Coupon Value (Regular interest Payment)
43.00
Years of Maturity 18
Yield (Found performing a What-if
5.45%
Rate analysis)
$
B
870.00
1 - 1
1
8

$ $
Bond Price = x ( 1.055 ) +
43.00 1,000.00
1
8

0.055 1.055

$ 0.38462 $
Bond Price = x 1 - +
43.00 4 1,000.00
0.055 2.600

$
Bond Price =
870.00
Yield
= 5.45%
Rate

18. Interest Rate Risk (L02) Bond J is a 3% coupon bond. Bond K is a 9% coupon bond. Both bonds
have 15years to maturity, make semiannual payments and have a YTM of 6%. If interest rates
suddenly rise by 2%, what is the percentage price change of these bonds? What if rates suddenly fall
by 2% instead? What does this problem tell you about the interest rate risk of lower coupon bonds?

Price Change = (Coupon Rate - YTM) x (Change in Interest

Rate)
Price Change = (Coupon Rate - YTM) x (Change in Interest
Rate)

Compounding J Bond
Price

Coupon
3.0% (Coupon Rate)
Rate
Par $
(Repaid at the end)
Value 1,000.00
$
Discount Bond
500.00
Period 2
$
Coupon Value (Regular interest Payment)
15.00
Years of Maturity 15
Yield
6.00%
Rate
$
B
705.99
1 - 1
3
0

$ $
Bond Price = x ( 1.03 ) +
15.00 1,000.00
3
0

0.030 1.030
$ 0.41198 $
Bond Price = x 1 - +
15.00 7 1,000.00
0.030 2.427
$
Bond Price =
705.99

Compounding J Bond
Price

Coupon
3.0% (Coupon Rate)
Rate
Par $
(Repaid at the end)
Value 1,000.00
$
Discount Bond
375.00
Period 2
$
Coupon Value (Regular interest Payment)
15.00
Years of Maturity 15
Yield
8.00%
Rate
$
B
567.70
1 - 1
3
0

$ $
Bond Price = x ( 1.04 ) +
15.00 1,000.00
3
0
 0.040 1.040
$ 0.30831 $
Bond Price = x 1 - +
15.00 9 1,000.00
0.040 3.243
$
Bond Price =
567.70

Change in bond price

p2 / p1)/p1
=(
Change in bond price
-19.59%
=

Compounding K Bond
Price

Coupon
9.0% (Coupon Rate)
Rate
Par $
(Repaid at the end)
Value 1,000.00
$
Discount Bond
1,500.00
Period 2
$
Coupon Value (Regular interest Payment)
45.00
Years of Maturity 15
Yield
6.00%
Rate
$
B
1,294.01
1 - 1
3
0

$ $
Bond Price = x ( 1.03 ) +
45.00 1,000.00
3
0

0.030 1.030
$ 0.41198 $
Bond Price = x 1 - +
45.00 7 1,000.00
0.030 2.427
$
Bond Price =
1,294.01

Compounding K Bond
Price

Coupon 9.0% (Coupon Rate)

Rate
Par $
(Repaid at the end)
Value 1,000.00
$
Discount Bond
1,125.00
Period 2
$
Coupon Value (Regular interest Payment)
45.00
Years of Maturity 15
Yield
8.00%
Rate
$
B
1,086.46
1 - 1
3
0

$ $
Bond Price = x ( 1.04 ) +
45.00 1,000.00
3
0

0.040 1.040
$ 0.30831 $
Bond Price = x 1 - +
45.00 9 1,000.00
0.040 3.243
$
Bond Price =
1,086.46

Change in bond price

p2 / p1)/p1
=(
Change in bond price
-16.04%
=

Suddenly decrease

Compounding J Bond
Price

Coupon
3.0% (Coupon Rate)
Rate
Par $
(Repaid at the end)
Value 1,000.00
$
Discount Bond
500.00
Period 2
$
Coupon Value (Regular interest Payment)
15.00
Years of Maturity 15
Yield 6.00%
Rate
$
B
705.99
1 - 1
3
0

$ $
Bond Price = x ( 1.03 ) +
15.00 1,000.00
3
0

0.030 1.030
$ 0.41198 $
Bond Price = x 1 - +
15.00 7 1,000.00
0.030 2.427
$
Bond Price =
705.99

Compounding J Bond
Price

Coupon
3.0% (Coupon Rate)
Rate
Par $
(Repaid at the end)
Value 1,000.00
$
Discount Bond
750.00
Period 2
$
Coupon Value (Regular interest Payment)
15.00
Years of Maturity 15
Yield
4.00%
Rate
$
B
888.02
1 - 1
3
0

$ $
Bond Price = x ( 1.02 ) +
15.00 1,000.00
3
0

0.020 1.020
$ 0.55207 $
Bond Price = x 1 - +
15.00 1 1,000.00
0.020 1.811
$
Bond Price =
888.02

Change in bond price p2 / p1)/p1

=(
Change in bond price
25.78%
=

Compounding K Bond
Price

Coupon
9.0% (Coupon Rate)
Rate
Par $
(Repaid at the end)
Value 1,000.00
$
Discount Bond
1,500.00
Period 2
$
Coupon Value (Regular interest Payment)
45.00
Years of Maturity 15
Yield
6.00%
Rate
$
B
1,294.01
1 - 1
3
0

$ $
Bond Price = x ( 1.03 ) +
45.00 1,000.00
3
0

0.030 1.030
$ 0.41198 $
Bond Price = x 1 - +
45.00 7 1,000.00
0.030 2.427
$
Bond Price =
1,294.01

Compounding K Bond
Price

Coupon
9.0% (Coupon Rate)
Rate
Par $
(Repaid at the end)
Value 1,000.00
$
Discount Bond
2,250.00
Period 2
$
Coupon Value (Regular interest Payment)
45.00
Years of Maturity 15
Yield 4.00%
Rate
$
B
1,559.91
1 - 1
3
0

$ $
Bond Price = x ( 1.02 ) +
45.00 1,000.00
3
0

0.020 1.020
$ 0.55207 $
Bond Price = x 1 - +
45.00 1 1,000.00
0.020 1.811
$
Bond Price =
1,559.91

Change in bond price

p2 / p1)/p1
=(
Change in bond price
20.55%
=

It can be said that lower coupon bonds are more vulnerable to fluctuations in interest rates than
higher coupon bonds, thus having a greater degree of interest rate risk.

20. Bond Yields (L02) Airbutus Co. wants to issue new 20-year bonds for some much-needed
expansion projects. The company currently has 8% coupon bonds on the market that sell for 6930,
make semiannual payments, and mature in 20 years. What coupon rate should the company set on
its new bonds if it wants them to sell at par?

Yield Calculator (Trial and Error)

Coupon
4.4% (Coupon Rate)
Rate
Par $
(Repaid at the end)
Value 13,860.00
$
Discount Bond
6,930.00
Period 2
$
Coupon Value (Regular interest Payment)
302.84
Years of Maturity 20
Yield (Found performing a What-if
8.74%
Rate analysis)
$
B
8,182.29
1 - 1
 4
0

$ $
Bond Price = x ( 1.044 ) +
302.84 13,860.00
4
0

0.044 1.044

$ 0.18070 $
Bond Price = x 1 - +
302.84 6 13,860.00
0.044 5.534

$
Bond Price =
8,182.29
Yield
= 8.74%
Rate