Your boss is back. This time he/she provides you a partial model to a bond valuation. This bond is a 20-year, 8%semiannual coupon bond with a par value of $1,000 may be called in 5 years at a call price of $1,040. The bond sells for$1,100. (Assume that the bond has been issued.) She needs you to complete the partial model for her. She needs the following to be answered.
- What is the bond’s yield to maturity?
- What is the bond’s current yield?
- What is the bond’s capital gain or loss yield?
- What is the bond’s yield to call?
- How would the price of the bond be affected by a change in the going market interest rate? (Hit: Conduct a sensitivity analysis of price to changes in the going market rate for the bond. Assume the bond will be called if and only if the going rate of interest falls below the coupon rate. This is an oversimplification, but assume it for the purpose of this problem.)
- Now assume the date is October 25, 2017. Assume further that a 12%, 10-year bond was issued on July 1, 2017, pays interest semiannually (on January 1 and July 1), and sells for$1,00. Use the attached spreadsheet to find the bond’s yield.