See attached file for full problem description.
A 10-year 12 percent semiannual coupon bond, with a par value of $1,000, may be called in 4
years at a call price of $1,060. The bond sells for $1,100. (Assume that the bond has just been
a. What is the bond's yield to maturity?
Basic Input Data:
Years to maturity:
Periods per year:
Periods to maturity:
Years till callable:
Periods till callable:
b. What is the bond's current yield?
Current yield =
c. What is the bond's yield to call
d. How would the price of the bond be affected by changing interest rates? (Hint: Conduct a sensitivity analysis of
price to changes in the yield to maturity, which is also the going market interest rate for the bond. Assume
that the bond will be called if and only if the going rate of interest falls below the coupon rate. That is an
oversimplification, but assume it anyway for purposes of this problem.)
Hint: you can use PV function to find values under different r's, and then use an IF
statement to determine which value is appropriate:
For example, when r=12%, the bond value today will be $1,000 if not called, and $1,037.64 if called.
Because the bond will be called if and only if r<12%, so the actual value considering call likelihood will be $1,000.
The best way to do the sensitivety analysis as I know is to use Excel's Data Table Command
Value of Bond If:
Not called Called
e. Draw a chart to show the relationship between bond price and interest rate based on data obtained in d.
In a very detailed solution in Excel, the problem is completed with narrative for better understanding.