Assignment 07- Bonds and Their Valuation 11. Bond listings and yield spreads As
ID: 2818583 • Letter: A
Question
Assignment 07- Bonds and Their Valuation 11. Bond listings and yield spreads As Aa The following bon ist is from the business section of a rewspaper on January 1, 20 matures on January 1 in 5,10, or 30 years Eadt bond shown pays a semianual coupon-the coupon rate is in the column labelled Coupon. 16. Notice that each bond shown The Last Price and Last: Yield columns indicate each bond's prioe and YTM at the end of tradng. EST Spread indicates he bond's spread above the re'evant u.S. Treasury benchmark. given as a peroentage. UST indiates which u.S. Treasury seaurity maturity is the relevamt benchrark for each bond. EST Voiume shows the rumber of bonds traded during the day. Prices are stated relative to a per value of $100 Fill in the rominal YTM for Pickman Inc.'s bands Last EST Company Coupon Maturity Price Last Yield Spread (Years)(1000s) Schubert Inc. 8.13% 01-01-2026 $82.25 11.11% Chapman Inc. 9.639 01-01-2046 $95.09 10.15% 4.50% 01-01-2021 $95.18 5.62% 6.20 10 72,070 30 65,275 59,277 7.15 557,.455 1056,305 Murphy & Co. 5.38% 01-01-2021 $101.02 5.14% 0.89 Pickman Inc. 7.75% 01-01-2026 $94.61 f chapman Inc. warts to issue new 30-year bands todary, what coupon rate would the bands have to pay to be 12.58% 10.15% 12.05% 11.65% ich bond is trading at a premium? O Schubert Inc. O Pckman Inc. O Chapman Inc. O Murphy & Co.Explanation / Answer
Answer 1. In order to calculate the nominal Yield to Maturity (YTM) for Pickman Inc., we may either use a Financial Calculator or the YIELD function in Microsoft Excel. The inputs required by the YIELD function are explained below:
Settlement date - This is the date of the issue of the security, which can be calculated by subtracting the years to maturity (same as the UST Years as this is a relevant benchmark for that security as mentioned in the question) - In case of Pickman it will be 2nd of January, 2016
Maturity date - As given in the question, this will be 1st of January, 2026
Rate - This is the stated coupon rate for the security i.e. 7.75%
Pr - This is the present price of the security i.e. $94.61
Redemption - This is the redemption value of the security i.e. $100
Frequency - This is the frequency of coupon payment in a year i.e. 2 (semi-annual)
Using the YIELD function we get the nominal YTM for Pickman Inc. as 8.56%.
The same can also be calculated by discounting the cashflow stream generated by the security at a suitable rate (YIELD) so that it equates current price of the bond.
Answer 2. The Yield to Maturity (YTM) for a bond basically tells us about the coupon rate which the bond needs to offer in order for it to trade at par. So, in case of a bond trading at discount and offering a higher YTM, if the bond needs to be issued freshly at par, then it will have to offer a coupon rate equivalent to the current YTM. Thus, if Chapman Inc. wants to issue new 30-year bonds at par today, Chapman Inc. would have to pay the same coupon rate as the YTM on its existing similar bonds i.e. 10.15% (Option 2).
Answer 3. A bond is said to be trading at premium if its current market price is higher than its face value and current YTM is lower than the coupon rate associated with it. This is true only for Murphy & Co. as its current price is $101.02 (higher than its face value of $100) and its YTM is 5.14% (lower than its coupon rate of 5.38%). Thus the only bond trading at premium is that of Murphy & Co. (Option 4).