AT&T Dell IBM Coupon 6.80 6.50 8.375% Maturity 05/15/2036 04/15/2038 11/01/2019
ID: 2662956 • Letter: A
Question
AT&T Dell IBMCoupon 6.80 6.50 8.375%
Maturity 05/15/2036 04/15/2038 11/01/2019
Frequency Semiannual Semiannual Semiannual
Rating A A- A+
1. Calculate the value of the bond if your required return is 5 percent on AT&T, 6.5 percent on Dell, and 8 percent on IBM.
2. Determine the yield to maturity (YTM) on the bonds given the following prices.
AT&T Dell IBM
Price $1,060.00 $1,016.57 $1,307.78
3. Based on each bond’s ratings and your determination of its yield to maturity explain how you rank each bond for risk and return.
4. Assume you had $10,000 to invest. How many of each bond would you have? What dollar amount of interest would each bond return on the investment for the next year? What would your percentage return be for the year, that is, your interest payments divided by the total amount invested? You must submit your backup in Excel or other supporting documentation showing how answers were reached.
Explanation / Answer
1) let us calculate the value of the bond using Excel sheet. Since bond is paying semi-annual payments Number of years becomes number of periods. I year = 2 periods. Step1: Go to excel sheet and then click "insert" to insert the function. Step2: select the "PV" function as we are finding out the value of the bond in this case. Step3: Enter the values as Rate = 5%; Nper = 52; PMT = -68 (6.8% on face value of the bond); FV = -1000 Step4: Now click "OK" to get the desired value. The bond value comes to 1331.53 For Dell enter the values as Rate = 6.5%; Nper = 56; PMT = -65; FV = -1000 and then click "OK" to get the desired value. The value comes to $1000 For IBM enter the values as Rate = 8%; Nper = 18; PMT = -83.75; FV = -1000 and then click "OK" to get the desired value. The value comes to $1035.14 2) Calculating the yield to maturity using excel sheet. Step1:Go to excel sheet and then click "insert" to insert the function. Step2: select the "Rate" function as we are finding out the rate of the bond in this case. Step3: Enter the values as Nper = 52; PMT= -68; Pv = 1060; FV = -1000 Step4: Click "OK" to get the desired value The value comes to "0.06 or 6%" Similarly calculating for Dell and IBm bonds, we get For Dell the rate = 0.0639 or 6.39% For IBM the rate = 0.056 or 5.6% 3) Based on the ratings and YTM, and also based upon the return and risk characteristics, AT & T bonds are the better investment. They give the better yield and the nature of risk is low compared to other bonds. 4) if we consider the present value of each bond given in part-2, then calculate the number of bonds each should be hold. Then calculate the coupon payment on each bond on the face value of the bond. Then, calculate the interest payment in percentage by dividing interest expense / total amount invested that is $10,000.