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Chapter (6):

Interest Rate and Bond Valuation


Spreadsheet Exercise:
CSM Corporation has a bond issue outstanding at the end of 2015. The bond has 15 years
remaining to maturity and carries a coupon interest rate of 6%. Interest on the bond is
compounded on a semiannual basis. The par value of the CSM bond is $1,000, and it is
currently selling for $874.42
.
TO do:
Create a spreadsheet similar to the Excel spreadsheet examples located in the chapter
for yield to maturity and semiannual interest to model the following:

a. Create a spreadsheet similar to the Excel spreadsheet examples located in the chapter to
solve for the yield to maturity.
b. Create a spreadsheet similar to the Excel spreadsheet examples located in the chapter to
solve for the price of the bond if the yield to maturity is 2% higher.
c. Create a spreadsheet similar to the Excel spreadsheet examples located in the chapter to
solve for the price of the bond if the yield to maturity is 2% lower.
d. What can you summarize about the relationship between the price of the bond, the par
value, the yield to maturity, and the coupon rate?

Answer:

CMS Case Study Annual Semi Annual


Annual Interest Payment 60 30
Coupon Interest Rate 6% 3%
Coupon Interest PMT 60 30
Numbers of years of maturity (N) 15 30
Par value (FV) 1000 1000
Bond value (PV) 874.42 874.42

a) The yield to maturity

YTM YTM = RATE (N, PMT, -PV, FV,0) 3.70%

b)
Price of the bond if YTM is PV = PV (6%, N, PMT,
($616.11)
2% higher = 6% FV,0)

C)
Price of the bond if PV = PV (2%, N, PMT,
($1,303.53)
YTM is 2% lower = 2% FV,0)
d)
As we can see previously from a to c:
- The bond price same as its par value when YTM = The Coupon Rate.
- The relation of:
o Coupon Rate
o The Price of the Coupon
o The par value
Represented finally by the YTM.
Chapter (6):
Interest Rate and Bond Valuation
P6 - 23:
Bond valuation and yield to maturity Mark Goldsmith’s broker has shown him two bonds.
Each has a maturity of 5 years, a par value of $1,000, and a yield to maturity of 12%. Bond A
has a coupon interest rate of 6% paid annually. Bond B has a coupon interest rate of 14%
paid annually.

a. Calculate the selling price for each of the bonds.


b. Mark has $20,000 to invest. Judging on the basis of the price of the bonds, how many of
either one could Mark purchase if he were to choose it over the other?
(Mark cannot really purchase a fraction of a bond, but for purposes of this question,
pretend that he can.)
c. Calculate the yearly interest income of each bond on the basis of its coupon rate and the
number of bonds that Mark could buy with his $20,000.
d. Assume that Mark will reinvest the interest payments as they are paid (at the end of each
year) and that his rate of return on the reinvestment is only 10%. For each bond, calculate
the value of the principal payment plus the value of Mark’s reinvestment account at the end
of the 5 years.
e. Why are the two values calculated in part d different? If Mark were worried that he would
earn less than the 12% yield to maturity on the reinvested interest payments, which of
these two bonds would be a better choice?

Answer:

Bond A Bond B
Maturity (Years) N 5 5
Face Value FV $ 1,000 $ 1,000
Yield to Maturity YTM 12% 12%
Coupon Interest Annually pmt% 6% 14%

a Selling Price SP ($783.71) ($1,072.10)


b Number of Bonds ($20,000) ($20,000) 25.5195321 18.6550541
c Interest Income Yearly INI/Y $ 1,531.17 $ 2,611.71

d)
Years Bond A INCOME Reinvestment Income 10%
1 60 0 0
2 60 126 66
3 60 198.6 138.6
4 60 278.46 218.46
5 1060 1366.306 306.306
Years Bond B INCOME Reinvestment Income 10%
1 140 0 0
2 140 294 154
3 140 463.4 323.4
4 140 649.74 509.74
5 1140 1854.714 714.714

e)
Reference to d analysis, will be Bond B the best chooses for Mark.
Chapter (8):
Risk and Return Fundamentals
The Requirements:
Compare between 3 companies Stocks by analysis the last 10 years:
- Telecom Egypt - ETEL
- Heliopolis Company for Housing and Development- HELI
Upper Egypt Flour Mills- UEFM
The Study Notes:
1- Use Mubasher Masr to collect stocks prices
2- According to differentiation in the Financial years for each company, where ETEL
start from Jan. to December and HELI from July to June. I toke the prices according to
the financial year for each company.
The Study:
Telecom Egypt - ETEL
Year (AR-
Pt+1 Pt Dividends AR Prob. (ARxProb.) (AR-ER)^2)x Prob.
ER)^2
2009 18.100 16.200 1.300 19.8% 0.100 0.020 0.012 0.001174147
2010 18.080 18.170 1.300 6.7% 0.050 0.003 0.001 2.54917E-05
2011 13.210 18.000 1.400 -18.8% 0.050 -0.009 0.077 0.003850483
2012 14.150 13.270 1.300 16.4% 0.100 0.016 0.006 0.000564114
2013 14.680 14.150 1.050 11.2% 0.150 0.017 0.001 7.58564E-05
2014 11.920 14.680 0.200 -17.4% 0.050 -0.009 0.069 0.003473186
2015 6.420 11.920 0.750 -39.8% 0.100 -0.040 0.238 0.023781494
2016 11.750 6.420 1.000 98.6% 0.150 0.148 0.804 0.120639826
2017 13.420 11.750 0.250 16.3% 0.100 0.016 0.006 0.000551031
2018 12.680 13.420 0.250 -3.7% 0.150 -0.005 0.016 0.002369525
ER (Average) 8.9%
ER(Weighted
Average) 15.7%
Sigma 12% 40%
CV (Simple
1.38
Average)
CV (Weighted Average) 2.52
RRR (Simple Average) 21%
RRR (Weighted Average) 55%
Heliopolis Company for Housing and Development- HELI
Year
Pt+1 Pt Dividends AR Prob. (ARxProb.) (AR-ER)^2 (AR-ER)^2)x Prob.
2008-2009 6.140 15.830 1.000 -54.9% 0.100 -0.055 0.813 0.081305516
2009-2010 4.290 6.220 1.500 -6.9% 0.050 -0.003 0.178 0.008898709
2010-2011 4.720 4.220 0.900 33.2% 0.050 0.017 0.000 2.20174E-05
2011-2012 3.890 4.810 0.750 -3.5% 0.100 -0.004 0.151 0.015060692
2012-2013 5.410 3.890 0.850 60.9% 0.150 0.091 0.066 0.009870104
2013-2014 10.170 5.410 1.000 106.5% 0.050 0.053 0.507 0.025344137
2014-2015 14.430 10.170 1.250 54.2% 0.100 0.054 0.036 0.003574048
2015-2016 11.280 14.430 2.700 -3.1% 0.150 -0.005 0.147 0.022109538
2016-2017 29.040 11.280 0.600 162.8% 0.100 0.163 1.625 0.162542493
2017-2018 29.610 29.040 0.500 3.7% 0.150 0.006 0.100 0.014968192
ER (Average) 35.3%
ER(Weighted
31.7%
Average)
Sigma 21% 59%
CV (Simple Average) 0.60
CV (Weighted Average) 1.85
RRR (Simple Average) 56%
RRR (Weighted Average) 90%

Upper Egypt Flour Mills- UEFM


Year
(AR-
Pt+1 Pt Dividends AR Prob. (ARxProb.) (AR-ER)^2)x Prob.
ER)^2
2008-2009 51.270 122.000 6.000 -53.1% 0.100 -0.053 0.551 0.055059347
2009-2010 55.940 52.280 6.000 18.5% 0.050 0.009 0.001 3.55692E-05
2010-2011 65.080 56.000 6.600 28.0% 0.050 0.014 0.005 0.000234982
2011-2012 46.180 66.990 5.500 -22.9% 0.100 -0.023 0.194 0.019358914
2012-2013 45.780 46.180 5.800 11.7% 0.150 0.018 0.009 0.001339888
2013-2014 79.870 45.780 6.250 88.1% 0.050 0.044 0.449 0.022426561
2014-2015 72.990 79.870 6.750 -0.2% 0.100 0.000 0.045 0.004540042
2015-2016 66.100 72.990 7.500 0.8% 0.150 0.001 0.041 0.006186758
2016-2017 122.480 66.100 12.250 103.8% 0.100 0.104 0.684 0.068364662
2017-2018 152.520 122.480 14.750 36.6% 0.150 0.055 0.024 0.003568787
ER (Average) 21.1%
ER(Weighted
16.9%
Average)
Sigma 16% 43%
CV (Simple Average) 0.74
CV(Weighted
2.52
Average)
RRR (Simple
Average) 74%
RRR(weighted
Average) 29%

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