several bond calculations, Writing Assignment Homework Help

Apr 30th, 2016
Sigchi4life
Category:
Art Design
Price: $125 USD

Question description

bond.xls

BOND PROJECT FIN 445

FALL 2015

This project will take you through several bond calculations so that you have a better understanding of bond dynamics and bond valuation.

You must turn in the project on the due date, both on paper and in electronic format.  You must copy and paste your Excel screens as noted below into your project paper

Use ARIAL type font, 12 point, double-spaced. Be thorough with your answers.

  1. [15 points]  First, calculate the value of a corporate bond using the information below. Do this calculation by hand and show all of your work!  Second, convert the value to price; round to 3 decimals.

Settlement Date:  5/15/2016

Maturity Date:    5/15/2018

Coupon rate:  4.50%

UST Yield:  2.25%

Spread (bps):  125

Yield to Maturity:  Calculate from Above Information

  1. [15 points]  Calculate on paper (a) the Macaulay duration and (b) the modified duration.  Show all of your work.
  1. [10 points]  Using the modified duration you just calculated, (a) estimate what the price change of the bond would be if the U.S. Treasury yield declines 50 basis points. (b) Now calculate the new price.  Do these calculations on paper.
  1. [20 points]  Using the format highlighted in Question #1 as a guide, create a Bond Price calculator in an Excel spreadsheet. Next, in the cell below the “Yield to Maturity” cell, create a cell for PRICE.  To the right of the “Price” label, insert Excel’s PRICE formula.
  1. Using the same inputs from question 1, use the Excel PRICE function to calculate the bond’s price.  Did you get the same answer that you calculated by hand?  Copy and Paste your spreadsheet into your project paper.
  1. Subtract 50 basis points from the U.S. Treasury yield in your Excel model.  (i) Copy and Paste your spreadsheet results into your project paper.  (ii) Compare this price to the new price you calculated in Question 3.  How do they compare?
  1.  [10 points]  Reset your Excel model to the original information from question #1.  Now change the maturity date to 5/15/2021.  What happens to the price of the bond versus your answer from Question 1?  Explain in one paragraph what happened to the price when you changed the maturity date and why.  Copy and Paste your spreadsheet into your project paper.
  1. [30 points]  I have placed an Excel spreadsheet on Blackboard (PROJECT BOND FIN 445 2015 Fall.xlsx).  The spread data represents three sectors of the bond market:  Investment Grade U.S. corporate bonds, High Yield U.S. corporate bonds, and U.S. dollar-denominated Emerging Market Corporate bonds.  As an analyst, your job is to determine whether each of these sectors are fairly valued, overvalued, or undervalued.  You will do the following:
  1. Create a separate chart for each of the three data series.
  1. Calculate the average spread for each data series, and plot on the chart.
  1. Calculate +/- 1 standard deviation for each data series, and plot on the chart.
  1. Copy each chart into your project paper.
  1. Given where the current spread is (the last data point), give me an explanation for each data series as to whether each sector today is a buy, sell, or wait (assume you don’t own any bonds, so “hold” is not an option).  Each explanation should be no more than half of one page.
  1. What other data or information that is not currently available to you might alter your buy/sell/wait decision?  Maximum one-half page.
  1. In one paragraph, rank the three bond sectors according to their relative value, i.e., if you had to make a choice, which would you buy 1st, 2nd, and 3rd?  Explain your answer.


Tutor Answer

(Top Tutor) Daniel C.
(997)
School: UCLA
PREMIUM TUTOR

Hi MIAZZZZ, Please check the attached file for detail and let me know if you have any questions, thank you. Best, James,

BOND PROJECT FIN 445
1. [15 points] First, calculate the value of a corporate bond using the information
below. Do this calculation by hand and show all of your work! Second, convert
the value to price; round to 3 decimals.

Settlement Date: 5/15/2016
Maturity Date:

5/15/2018

Coupon rate: 4.50%
UST Yield: 2.25%
Spread (bps): 125
The yield of bond is
2.25% +125*0.01% = 3.5%

Assume the par value of the bond is $1000. Present value of 1st coupon payment:

1000*4.5%/1.035 = 43.478

Present value of 2nd coupon payment
1000*4.5%/1.0352 = 42.008

Present value of principle payment
1000/1.0352 = 933.511

Market price of bond is the sum of the three:

45
45
1000


2
(1  0.035) (1  0.035)
(1  0.035) 2
 43.478  42.008  933.511
PV 

 1018.997

Yield to Maturity: Calculate from Above Information

Yield to maturity = UST Yield: 2.25%+ spreading /10000 = 2.25%+1.25% = 3/5%

1. [15 points] Calculate on paper (a) the Macaulay duration and (b) the modified
duration. Show all of your work.

Macaulay duration

1 * PV 1  2 * PV 2 43.478 *1  (42.008  933.511) * 2

PV
1018.997
 1.957 y


Modified duration
Macaulay duration
yield _ to _ maturity
1
number _ of _ coupon _ periods _ peryear
1.957

0.035
1
1
 1.891


1. [10 points] Using the modified duration you just calculated, (a) estimate what
the price change of the bond would be if the U.S. Treasury yield declines 50
basis points. (b) Now calculate the new price. Do these calculations on paper.

a.)

The yield now change to

y= 1.75%+1.25% = 3.00%
y=-0.5% = -0.005

Using the relationship

dP 1
= –modified duration.
dy P
dP
 1.891 p  1.891 * 1018.997  1926.923
dy
P  1926.923 * y
 1927 * (0.005)
 $9.635

price increases by $9.635

b) from a) the price is

1018.997+9.635 = 1028.63

1. [20 points] Using the format highlighted in Question #1 as a guide, create a
Bond Price calculator in an Excel spreadsheet. Next, in the cell below the “Yield
to Maturity” cell, create a cell for PRICE. To the right of the “Price” label, insert
Excel’s PRICE formula.

See attach excel file sheet1

1. Using the same inputs from question 1, use the Excel PRICE function to
calculate the bond’s price. Did you get the same answer that you calculated by
hand? Copy and Paste your spreadsheet into your project paper.

Settlement
date

5/15/2016

Maturity date

5/15/2018

Couple rate

4.50%

UST Yield

2.25%

Spread (bps)

125

Yield to
Maturity
Price

3.500%
$1,019.00

The above result are the same as we what we calculated by hand.

1. subtract 50 basis points from the U.S. Treasury yield in your Excel model. (i)
Copy and Paste your spreadsheet results into your project paper. (ii) Compare
this price to the new price you calculated in Question 3. How do they compare?

Settlement
date

5/15/2016

Maturity date

5/15/2018

Couple rate

4.50%

UST Yield

2.25%

Spread (bps)

75

Yield to
Maturity
Price

3.000%
$1,028.70

This price is $0.07 different from the one calculated in question 3 ($1028.63).

1. [10 points] Reset your Excel model to the original information from question
#1. Now change the maturity date to 5/15/2021. What happens to the price of
the bond versus your answer from Question 1? Explain in one paragraph what
happened to the price when you changed the maturity date and why. Copy and
Paste your spreadsheet into your project paper.

Settlement
date

5/15/2016

Maturity date

5/15/2021

Couple rate

4.50%

UST Yield

2.25%

Spread (bps)

125

Yield to
Maturity
Price

3.500%
$1,045.15

The price increases to $1045.15, which increases by $26.15. The bond price increase
when we change the matur...

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