Bond Valuation
“A bond is a long-term contract under which a borrower agrees to make payments of interest and principal on specific dates to the bondholder (investor). The interest payments are determined by the coupon rate and the principal, or face, value of the bond. The coupon rate represents the total interest paid each year, stated as a percentage of the bond’s face value. Typically, interest is paid semiannually, although bonds that pay interest annually, quarterly, and monthly also exist. For example, a 10 percent coupon bond with a face value equal to $1,000.00 would commonly pay %50 interest every six months, or a total of $100 each year.”
Bond A has $1,000.00 face value, 10-year maturity, and 10% coupon, paid semi-annually.
Bond B has $1,000.00 face value, 5-year maturity, and 12% coupon, paid annually.
Own Interest Rate: 6.62303
1. Evaluate each bond at the own interest rate (please refer to Module 2 – Extra Credit for the rate).
2. What is the price of each bond when rates go up by 100 basis points, from that interest rate?
3. What is the price of each bond when rates go down by 100 basis points, from that interest rate?
4. Observe the movement in price within those 200 basis points. Which/why, has higher market risk?
Please show the answer in Excel in two ways, on the same tab/sheet: (i) by listing all the cash flows, their present value, and their sum, (ii) by use of the PV formula. Then, (iii) show the answer in the Word document, under a clear heading of Question 1, using (see your textbook, page 177):
Show the substitution of the appropriate values in the appropriate spaces, then the answer. Please try to explain 1 – 4 above as best as possible, in complete sentence structure and researched thought.
