Assignment
Questions:
1. What is the yield to maturity if you purchase the bond?
N=20 (semi)
PV= $992
FV= -1000
PMT= -20 (semi)
i=2.05*2=4.10%
2. What is the yield to call if you purchase the bond?
Bond price = 992
C = 40
Call Price = 1000
t = 2
YTC = the yield to call
P = (C / 2) x {(1 - (1 + YTC / 2) ^ -2t) / (YTC / 2)} + (CP / (1 + YTC / 2) ^ 2t)
YTC=2.412*2=4.82%
3.What is the yield to worst?
When i=4.10% is the yield to worst.
4.What would be the impact to the price of the bond if all interest rates rise 100bps and fall 100bps? What would be the impact on the coupon interest paid on this bond?
The rise and fall of bond's interest rate has a direct inverse relationship to the bond price and rate of return on the bond coupon payment is higher if the purchase price is lower.
5. Why did the company add a call date to this bond? How can the call date affect the bondholders and the company?
A call date is the date after which a bond issuer can redeem a callable bond.This is a series of call dateon or before which the company can redeem the bond at specific prices. The call schedule can be found in the bond's prospectus.
First, they increase reinvestment risk because when interest rates fall, the bond issuer is more likely to exercise the call option in order to refinance higher interest debt with lower interest debt. This leaves the investor with cash that must be reinvested at the prevailing lower market rate.
Second, call options put a ceiling on a bond's potential price appreciation because when interest rates fall the market assumes the bond will be called at its call price, and the price will not go any higher than its call price. Thus, the true yield of a callable bond is almost always lower than its yield to maturity.
Because call provisions put investors at a disadvantage, bonds with call provisions tend to be worth less than noncallable bonds with the same terms. So in order to entice investors to buy, companies must offer higher coupon rates on callable bonds.
6. What is the impact to the company and the bondholders if the credit rating goes up and if it goes down?
Investors generally rely on bond ratings to evaluate the credit quality of specific bonds. Credit ratings indicate on a scale of high to low the probability of default; that is, the probability that debt will not be repaid on time in full. Failure to redeem principal at maturity would constitute a default. Failure to make interest payments on time (that is, to pay coupons to bondholders) would also constitute a default.