Problem: After recently receiving a bonus, you have decided to add some bonds to your investment portfolio. You have narrowed your choice down to the following bonds (assume semi-annual payments):
Bond A Bond B
Settlement Date 12/15/2007 12/15/2007
Maturity Date 4/15/2014 6/15/2025
Coupon Rate 5.00% 9.50%
Price $890 $1,040
Face Value $1,000 $1,000
Required Return 7.25% 8.75%
Q1. Using the PRICE function, calculate the intrinsic value of each bond. Is either bond currently undervalued? How much accrued interest would you have to pay for each bond?
Q2. Using the YIELD function, calculate the yield to maturity of each bond using the current market prices
Q3. Using the DURATION function, which bond would you rather own if you expect market rates to fall by 2% across the maturity spectrum? What if rates will rise by 2%? Why?