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Diane Carumay Tiffany Ching Melvin Catarroja Jr. Aissa Valerie Sicio Abelardo
Bea Jr.
The Case:
Laura Donahue
Assignment
Strategies
Prepare a seminar
explaining valuation
process to the customers
Challenges deep-dive
Statement of the Problem
Question 1
Scenario
To begin, assume that it
is now January 1, 1993,
and that each bond in
Table 1 matures on
December 31 of the year
listed. Further, assume
that each bond has a
$1000 par value, each
had a 30-year maturity
when it was issued, and
the bonds currently have
a 10% required nominal
rate of return.
Question 1
Scenario
b.) What would be the value of each bond if they had annual
coupon payments?
Excel formula to get PV: =PV(rate, nper,pmt,[fv])
Mat
urity
Year
Required
Nominal
Rate of
Return
Cou
pon
Rate
Par
Valu
e
(FV)
Year
s to
Mat
urity
199
7
10%
4.50
0%
$1,0
00.0
0
Pay
men
t
$45.
00
Bon
d
Valu
e
(PV)
$79
1.51
c.) TECOs bonds, like virtually all bonds, actually pay interest
$1,0
15
$86
00.0
What
is $82.
the 6.89
each bonds value under these
0
50
conditions? Are the bonds currently selling at a discount or at
201
10%
12.6 $1,0
25
$1,2
a premium?
200
10%
8.25
7
0%
semiannually.
7
Mat
urity
Year
199
7
Required
Nominal
Rate of
Return
5%
25%
Cou
pon
Rate
00.0
0
Par
Valu
e
(FV)
2.25
0%
$1,0
00.0
Year
s to
Mat
urity
10
$12
6.25
Pay
men
t
38.2
7
Bon
d
Valu
e
(PV)
22.5
$78
7.65
Question 1
Scenario
To begin, assume that it
is now January 1, 1993,
and that each bond in
Table 1 matures on
December 31 of the year
listed. Further, assume
that each bond has a
$1000 par value, each
had a 30-year maturity
when it was issued, and
the bonds currently have
a 10% required nominal
rate of return.
Excel
Terms to remember:
10%
10.25%
Question 1
Scenario
To begin, assume that it
is now January 1, 1993,
and that each bond in
Table 1 matures on
December 31 of the year
listed. Further, assume
that each bond has a
$1000 par value, each
had a 30-year maturity
when it was issued, and
the bonds currently have
a 10% required nominal
rate of return.
Required Cou
Nominal pon
Rate of Rate
Return
Par
Valu
e
(FV)
Year
s to
Mat
urity
Pay
men
t
Bon
d
Valu
e
(PV)
Mat
urity
Year
Required Cou
Nominal pon
Rate of Rate
Return
Par
Valu
e
(FV)
Year
s to
Mat
urity
Pay
men
t
Bon
d
Valu
e
(PV)
$1,0
00.0
0
199
7
10%
4.50
0%
$45.
00
$79
1.51
2.25 is$1,0
10
$22. $78RELATED the maturity and
Bond5%value
INVERSELY
0% 00.0
50
7.65
0 compounding period
199
7
Question 2
Scenario
Now, regardless of your
answers to Question 1,
assume that the 5-year
bond is selling for
$800.00, the 15-year
bond is selling for
$865.49 and the 25-year
bond is selling for
$1,220.00. (Note: Use
these prices, and
assume semiannual
coupons for the
remainder of the
questions).
2.2
5%
4.1
Year
s to
Matu
rity
(Peri
ods)
Pay
men
t
Valu
e of
Bon
d
(PV)
10
$1,
000
$22. $800
50
.00
30
Nomi
nal
Semi
Annu
al
YTM
No
min
al
Ann
ual
YT
M
4.82
%
9.6
3%
5.00
10.
Question 2
Scenario
Now, regardless of your
answers to Question 1,
assume that the 5-year
bond is selling for
$800.00, the 15-year
bond is selling for
$865.49 and the 25-year
bond is selling for
$1,220.00. (Note: Use
these prices, and
assume semiannual
coupons for the
remainder of the
questions).
Yea
rs
to
Mat
urit
y
(Pe
riod
s)
2.2
10
5%Yield
$1, to
00
0
Pa
ym
ent
Valu No No Eff
e of min min ecti
Bon
al
al
ve
d
Se Ann YT
(PV miA ual
M
)
nnu YT
al
M
YT
M
$22 $80
Maturity
.50 0.00
4.8
2%
to
9.6 9.8
3% used
7%
be
in comparing securities
Terms to remember:
4.1
30
5.0 10. 10.
3% $1,
$41 $86 0% 00
25
Yield 00
- amount of.25
return
will
5.49on investment
%
% realize on a security, in this case, a
bond. 0
6.3
50
$1,2 5.0 10. 10.
Yield
to
Maturity
(YTM)
(interest
1% $1,
$63 20.0- the
9%rate18
44 rate) effective (inclusive of gains and
loss) of
until maturity
00the bond.13
0
%
%
0
Question 3
Scenario
a.) What is (1) the nominal yield and (2) the effective annual
YTM on this bond?
Nominal YTM - coupon rate of the bond = 7 percent
Terms to remember:
Current Yield - annual interest
paymet divided by bonds current
price
Coup
on
Rate
Paym
ent
Market
Value
(PV)
Par
Value
(FV)
YTM
25
7.38
%
10.2
Curr
0%
ent
Yield
73.75
747.4 price
1,000 9.87
Bonds
=
8
%
Bonds value
Question 3
Scenario
Req
uire
d
Co Par
No
up Val
min
on ue
al
Rat (FV
Rat
e
)
e of
Ret
urn
Terms to remember:
10.
18
%
4.5 100
0%
0
Y
for
19
93
Y1
for
19
94
Bon Bon
d
d
Valu Valu
Pay
e
e
me
(PV (PV
nt
at
at
199 1994
3)
)
45
12.
63
%
100
0
7.3
100
25
24
$78 $820
5.67 .65
Change '93 - '94
$85 $859
4.70 .21
$1,2
126
18.9
.25
0
$34.98
$1,2
16.7
3
4.45%
73.
$4.51
$751
0.53%
$74
Question 3
Scenario
Question 3
Scenario
Supposed TECO has a
second bond with 25
years left to maturity (in
addition to the one listed
in Table 1), which has a
coupon rate of 7
percent and a market
price of $747.48.
Question 4
Scenario
Question 4
Scenario
Consider the riskiness of
the bonds
c.) Assume that you bought 5-year, 15-year and 25-year bonds
all with a 10% coupon rate and semiannual coupons, at their
$1,000 par values. Which bonds value would be most affected
if interest rates rose to 13%? Which would be least affected?
If you are using the Lotus modem, calculate the new value of
each bond.
Re
quir
ed
No
min
al
Rat
e
of
Ret
urn
Co
up
on
Ra
te
@
10
%
Co
up
on
Ra
te
@
10
%
P
a
r
V
al
u
e
(
F
V
)
M
at
uri
ty
P
M
T
@
10
%
P
M
T
@
13
%
BV
@
10
%
BV
@
13
%
%
DI
FF
5.0
0%
6.5
0%
1
0
0
0
30
50
65
5
28.
65
6
23
changes.
70. .5
06
9
%
Question 4
Scenario
Consider the riskiness of
the bonds
YEAR 5
YEAR
10
YEAR
15
YEAR
20
YEAR 25
ONE INTEREST REINVESTMENT
YEAR
25
Question 4
Scenario
Consider the riskiness of
the bonds
Question 5
Scenario
Req
uire
d
Co Par
No
up Val
min
on ue
al
Rat (FV
Rat
e
)
e of
Ret
urn
10
8.2
100
Bon Bon
Yd
d
Ma
Pay
5
Valu Valu
tur
me
for
e@ e@
e Proposed
nt
> calculated
bond value
5th
Mat
5th
ure Loss
year of $157.53
Borrower
$82
$86
$892
Solution
More premium subscribers
Implementation
09.05.XX
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The team
CEO
Jude Parker
Dir. of Sales
Dir. of
Engineering
Ashton Smith
Casey Baumer
North America
Lead
Asia Lead
Europe Lead
Ashley Smith
Torrence Reyes
Sam Lincoln
Jessie Baker
Alison Brown
max growth
Impact
XX% sales increase