Open the spreadsheet below and answer the questions provided. Make sure to go to four (4) significant digits (e.g. 3.4576%).
1-4 Question 1 - Use the coupon, par and purchase price given to show the yield to maturity (YTM) Cash Flows Purch.0.51.01.52.02.53.03.54.04.55.05.56.06.57.07.58.08.59.09.510.0 Coupon7.55%(882) Par 1,000.00 YTM Question 2 - Use the coupon, interest rate and par given to calculate the bond's price Cash Flows 0.51.01.52.02.53.03.54.04.55.05.56.06.57.07.58.08.59.09.510.010.511.011.512.012.513.013.514.014.515.0 Coupon3.33% Par 1,000.00 Rate2.75% Bond price Question 4 - Use the coupon, par and purchase price given to show the yield to maturity (YTM) Cash Flows Purch.1.02.03.04.05.06.07.08.09.010.011.012.013.014.015.016.017.018.019.020.0 Coupon4.25%(1,312) Par 1,000.00 YTM Question 2 - Use the coupon, interest rate and par given to calculate the bond's price Cash Flows 1.02.03.04.05.06.07.08.09.010.011.012.013.014.015.016.017.018.019.020.021.022.023.024.025.026.027.028.029.030.0 Coupon4.66% Par 1,000.00 Rate8.25% Bond price 5-8 Question 5 - Use the coupon, par and purchase price given to show the yield to maturity (YTM) Cash Flows Purch.0.51.01.52.02.53.03.54.04.55.05.56.06.57.07.58.08.59.09.510.0 Coupon0.00%(349) Par 1,000.00 YTM Question 6 - Use the coupon, interest rate and par given to calculate the bond's price Cash Flows 0.51.01.52.02.53.03.54.04.55.05.56.06.57.07.58.08.59.09.510.010.511.011.512.012.513.013.514.014.515.0 Coupon0.00% Par 1,000.00 Rate5.25% Bond price Question 7 - Use the coupon, par and purchase price given to show the yield to maturity (YTM) Cash Flows Purch.1.02.03.04.05.06.07.08.09.010.011.012.013.014.015.016.017.018.019.020.0 Coupon0.00%(96) Par 1,000.00 YTM Question 8 - Use the coupon, interest rate and par given to calculate the bond's price Cash Flows 1.02.03.04.05.06.07.08.09.010.011.012.013.014.015.016.017.018.019.020.021.022.023.024.025.026.027.028.029.030.0 Coupon0.00% Par 1,000.00 Rate7.00% Bond price 9 Non-CallableCallable YTM Coupon6.33%Cash Flows Par 1,000.00Purch.0.51.01.52.02.53.03.54.04.55.05.56.06.57.0 Non-Callable Callable Notes: The callable bond is callable at the end of year 5 at a price of $989 including coupon. The bond price is $832.5000. 10 a. YTMb. Durationc. New Prices if rates go to ABABAB YTMNew Prices are Alfonso Canella: Alfonso Canella: When interest rates rise, as they do in this example, bond prices fall. Conversely, when rates fall, bond prices rise. The relationship is inverse. Duration is used as a proxy for how exposed your bond is to changes in interest rates. The higher the duration, the more exposed you are to changes in interest rates. So, if you expect rates to rise and bond prices to fall, you will try to reduce the duration of your bonds. If you expect rates to fall and prices to rise, you increase the duration of your bonds. In the first instance, you reduce your losses. In the second instance, you maximize your gains. Bond portfolio management is ALL about taking a position on future interest rates and, in some cases too, about taking a position on the long term credit quality of the bonds. Bonds that are tied to mortgages have various risks: interest rates increases or falls, credit quality erosion, and pre-payment (when mortgages are refinanced or homes are sold and the mortgage is paid off). These mortgage-backed bonds were the cause of the 2008 economic crisis. Too many mortgages defaulted (in other words, credit quality collapsed) and the bonds tied to these mortgages defaulted, triggering bank losses and the crisis. Alfonso Canella: Alfonso Canella: When interest rates rise, as they do in this example, bond prices fall. Conversely, when rates fall, bond prices rise. The relationship is inverse. Duration is used as a proxy for how exposed your bond is to changes in interest rates. The higher the duration, the more exposed you are to changes in interest rates. So, if you expect rates to rise and bond prices to fall, you will try to reduce the duration of your bonds. If you expect rates to fall and prices to rise, you increase the duration of your bonds. In the first instance, you reduce your losses. In the second instance, you maximize your gains. Bond portfolio management is ALL about taking a position on future interest rates and, in some cases too, about taking a position on the long term credit quality of the bonds. Bonds that are tied to mortgages have various risks: interest rates increases or falls, credit quality erosion, and pre-payment (when mortgages are refinanced or homes are sold and the mortgage is paid off). These mortgage-backed bonds were the cause of the 2008 economic crisis. Too many mortgages defaulted (in other words, credit quality collapsed) and the bonds tied to these mortgages defaulted, triggering bank losses and the crisis. when rates go to7.500% Coupon5.15%5.550% Par1,000.001,000.00 Cash Flows: Purchase price(863.00)(811.00) 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 8.5 9.0 9.5 10.0 10.5 11.0 11.5 12.0 12.5 13.0 13.5 14.0 14.5 15.0 v. MAR 22 No content - Intentionally left blank