Bond valuations and yields: What do they mean, and how do you derive their value
ID: 2617487 • Letter: B
Question
Bond valuations and yields: What do they mean, and how do you derive their values? Consider the following case of investment-grade bonds issued by Procter & Gamble Co. (P&G;) in August 2011. Proctor & Gamble (NYSE: PG) I Issue Details Issue Size ($Mil) $1,000 Coupon 0.700% Maturity Date 08/15/2014 Coupon Type Fixed Callable Yes Coupon Frequency Semiannually Proctor and Gamble's total amount of debt increased from 31.9% in March 2011 to 34.2% in December 2011, mainly due to its net debt issuances to fund general corporate purposes. What was the annual cost of the funds to P&G; raised from the $1.0 billion bonds that mature in 2014? basis points.Explanation / Answer
Answer A) Annual cost of fund = coupon rate = 70 basis point
Answer b) annual yield= coupon / price = 0.699%
Answer C) Spread= Coupon rate - required rate = 0.7-0.6 = 0.1 = 10 basis point
required rate for 3 years =0.79 -0.19 = 0.60
0.60 required by market and sold at 0.70 .
Answer D) 96.815
Answer E) Less discount
Answer F) Reduce Reduce by 3.185 %
Answer G) yield to call = 1.8% ,when interest rate rise
Answer H) fall increase