Bond valuations and yields: What do they mean, and how do you derive their value
ID: 2720656 • 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) | 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. If the bond sold at 100.10 at the time of issue, investors observed that required annual yield would be Looking at the comparable U.S. Treasury yield, these bonds were issued at a spread of basis points. Because the coupon rate is the yield required by the market, the bond sold at at the time of issue. If the current yield is higher than the coupon rate, investors would want a higher return on their investment. If the coupon rate is less than the yield required by the market, the price of the bond is most likely to be the par value of the bond, and the bond will sell at As interest rates increase, the yield required by the market will increase, and the price of the bond is likely to Thus, when the yield increases to 1.3%, the bond's price byExplanation / Answer
Answer
Note : Unable to answer Question 3 and Question 4 as graph is cannot be clearly interpreted.
Answer 1
70 basis points is the annual cost of the funds to P&G raised from the $ 1.0 billion bonds that mature in 2014
Answer 2
If the bond sold at 100.10 at the time of issue, investors observed that required annual yield would be
= ($ 1000 * 0.7%) / (1000 * 100.10%)
= $ 7 / $ 1001
=0.6993 %
Answer 5
If the new observed yield of the bond is 1.3% , the bond is likely tobe trading at a price of
Price = ($ 1000 * 0.7%) / 1.3%
= $ 7 / 1.3%
= $ 538.46
Answer 6
If the current yield is higher than the coupon rate, investors would want a higher return on their investment. If the coupon rate is less than the yield required by the market, the price of the bond is most likely to be less than the par value of the bond and bond will sell at discount.
Answer 7
As interest rates increase, the yield required by market will increase, and the price of the bond is likely to fall. Thus the yield increases to 1.3%, the bond’s price will fall by $ 461.54 ($ 1000 - $ 538.46)