P6–23 Bond valuation and yield to maturity Mark Goldsmith’s broker has shown him

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
a:
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,
b:
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. c:
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?

d:

e:
 bonds A B
n 5 5
fv $ 1,000.00 $ 1,000.00
pmt $ 60.00 $ 140.00
ytm/i 12% 12%
pv $ -783.71 $ -1,072.10

MARK can purchase :

from bond A: 20000$/783.71$= 25.5 bonds
from bond B: 20000$/1072.1$ = 18.65 bonds

bond A bond B
YEAR CASH FLOW YEAR CASH FLOW
0 $ -783.71 0 $ -1,072.10
1 $ 60.00 1 $ 140.00
2 $ 60.00 2 $ 140.00
3 $ 60.00 3 $ 140.00
4 $ 60.00 4 $ 140.00
5 $ 1,060.00 5 $ 1,140.00
THE YEARLY INTEREST $ 300.00 THE YEARLY INTEREST $ 700.00
the yearly int. which he could buy $ 7,650.00 the yearly int. which he could buy $ 13,055.00
bond A bond B
face value $ 25,500.00 face value $ 18,650.00
n 5 n 5
rate 10% rate 10%
pmt $ -1,530.00 pmt $ -2,611.00
fv(annual+int) $ 9,340.80 fv(annual+int) $ 15,940.42
sum(face value + fv) $ 34,840.80 sum(face value + fv) $ 34,590.42
1st : the two values calculated in part d different because : the pmt of bond A less
than the pmt of bond B

2nd :If Mark were worried that he would earn less than the 12% yield to maturity on the
reinvested interest payments then by calculations we got :

bond A bond B
n 5 n 5
rate 12% rate 12%
pmt $ 1,530.00 pmt $ 2,611.00
pv $ 19,984.61 pv $ 19,992.80
fv $ -44,939.56 fv $ -51,821.43
3rd : which of these two bonds would be a better choice :
so I see that the bond B would be the best choice for MARK
 Heliopolis Housing Company
Year
Pt+1 Pt Divedends AR Prob. (ARxProb.) (AR-ER)^2
2009 16.17 .‫م‬.‫ج‬ 17.44 .‫م‬.‫ ج‬1.50 .‫م‬.‫ج‬ 1.3% 0.100 0.001 0.0014
2010 15.42 .‫م‬.‫ج‬ 17.18 .‫م‬.‫ ج‬1.50 .‫م‬.‫ج‬ -1.5% 0.050 -0.001 0.0043
2011 15.01 .‫م‬.‫ج‬ 15.49 .‫م‬.‫ ج‬0.90 .‫م‬.‫ج‬ 2.7% 0.050 0.001 0.0005
2012 13.30 .‫م‬.‫ج‬ 12.58 .‫م‬.‫ ج‬0.80 .‫م‬.‫ج‬ 12.1% 0.100 0.012 0.0049
2013 11.48 .‫م‬.‫ج‬ 13.45 .‫م‬.‫ ج‬0.85 .‫م‬.‫ج‬ -8.3% 0.150 -0.012 0.0179
2014 13.40 .‫م‬.‫ج‬ 13.36 .‫م‬.‫ ج‬1.00 .‫م‬.‫ج‬ 7.8% 0.050 0.004 0.0007
2015 8.09 .‫م‬.‫ج‬ 7.99 .‫م‬.‫ج‬ 1.25 .‫م‬.‫ج‬ 16.9% 0.100 0.017 0.0140
2016 8.21 .‫م‬.‫ج‬ 9.27 .‫م‬.‫ج‬ 2.70 .‫م‬.‫ج‬ 17.7% 0.150 0.027 0.0160
2017 10.28 .‫م‬.‫ج‬ 11.11 .‫م‬.‫ ج‬0.60 .‫م‬.‫ج‬ -2.1% 0.100 -0.002 0.0051
2018 14.07 .‫م‬.‫ج‬ 14.02 .‫م‬.‫ ج‬0.50 .‫م‬.‫ج‬ 3.9% 0.150 0.006 0.0001
ER (Average) 5.0%
ER(Waihted Average) 5.3%
Sigma 3%
CV
RRR

Upper Egypt Flour Mills Company

Year
Pt+1 Pt Divedends AR Prob. (ARxProb.) (AR-ER)^2
2009 52.280 59.560 6.00 .‫م‬.‫ج‬ -2.1% 0.100 -0.002 0.008007
2010 56.000 59.670 6.00 .‫م‬.‫ج‬ 3.9% 0.050 0.002 0.000838
2011 66.990 64.300 6.60 .‫م‬.‫ج‬ 14.4% 0.050 0.007 0.005850
2012 46.180 47.560 5.50 .‫م‬.‫ج‬ 8.7% 0.100 0.009 0.000347
2013 45.780 49.770 5.80 .‫م‬.‫ج‬ 3.6% 0.150 0.005 0.001000
2014 79.870 80.030 6.25 .‫م‬.‫ج‬ 7.6% 0.050 0.004 0.000066
2015 72.990 65.000 6.75 .‫م‬.‫ج‬ 22.7% 0.100 0.023 0.025210
2016 66.100 78.030 7.50 .‫م‬.‫ج‬ -5.7% 0.150 -0.009 0.015567
2017 122.480 132.210 12.25 .‫م‬.‫ج‬ 1.9% 0.100 0.002 0.002394
2018 152.520 148.060 14.75 .‫م‬.‫ ج‬13.0% 0.150 0.019 0.003813
ER (Average) 6.8%
ER(Waihted Average) 6.0%
Sigma 3%
CV
RRR

Telecom Egypt (ETEL)

Year
Pt+1 Pt Divedends AR Prob. (ARxProb.) (AR-ER)^2
2009 16.170 16.470 1.30 .‫م‬.‫ج‬ 6.1% 0.100 0.006 0.000067
2010 15.420 15.090 1.30 .‫م‬.‫ج‬ 10.8% 0.050 0.005 0.001530
 2011 15.010 15.100 1.30 .‫م‬.‫ج‬ 8.0% 0.050 0.004 0.000126
2012 13.300 13.650 1.40 .‫م‬.‫ج‬ 7.7% 0.100 0.008 0.000064
2013 11.480 11.910 1.30 .‫م‬.‫ج‬ 7.3% 0.150 0.011 0.000017
2014 13.400 13.240 1.05 .‫م‬.‫ج‬ 9.1% 0.050 0.005 0.000506
2015 8.090 8.200 0.20 .‫م‬.‫ج‬ 1.1% 0.100 0.001 0.003355
2016 8.280 8.550 0.75 .‫م‬.‫ج‬ 5.6% 0.150 0.008 0.000163
2017 10.280 10.120 1.00 .‫م‬.‫ج‬ 11.5% 0.100 0.011 0.002091
2018 14.100 14.110 0.25 .‫م‬.‫ج‬ 1.7% 0.150 0.003 0.002692
ER (Average) 6.9%
ER(Waihted Average) 6.2%
Sigma 1%
CV
RRR
 (AR-ER)^2)x Prob.
0.0001391969
0.0002153717
0.000027338
0.0004946244
0.0026841035
3.7393309513E-05
0.0014033727
0.0023972118
0.0005069332
1.90434740111E-05

9%
1.69
14.17%

(AR-ER)^2)x Prob.
0.0008007353
0.00004189
0.0002925063
3.47245936844E-05
0.0001500267
3.28340202868E-06
0.0025209929
0.0023349801
0.000239437
0.000571993

8%
1.38
14.41%

(AR-ER)^2)x Prob.
6.69340985249E-06
7.65217517024E-05
6.31089045984E-06
6.44053848086E-06
2.58347282655E-06
2.52943856331E-05
0.0003354978
2.44128010791E-05
0.0002090933
0.0004038635

3%
0.53
9.53%
CSM Corporation has a bond issue outstanding at the end of 2015. The bond has
solution
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 chapte
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?

d
d
 solution

the yield to maturity semi annual rate

year cash flow
0 $ -874.42
$ 30.00
1
$ 30.00
$ 30.00
2
$ 30.00
$ 30.00
3
$ 30.00
$ 30.00
4
$ 30.00
$ 30.00
5
$ 30.00
$ 30.00
6
$ 30.00
$ 30.00
7
$ 30.00
$ 30.00
8
$ 30.00
$ 30.00
9
$ 30.00
$ 30.00
10
$ 30.00
$ 30.00
11
$ 30.00
$ 30.00
12
$ 30.00
$ 30.00
13
$ 30.00
$ 30.00
14
$ 30.00
$ 30.00
15
$ 1,030.00
ytm 4%
fv $ 1,000.00
pmt $ 30.00
n 30
ytm 6%
pv (price of the bond) $ -1,000.00

fv $ 1,000.00
pmt $ 60.00
n 15
ytm 2%
pv (price of the bond) $ -1,513.97
at (a,b,c) its shown the relationship between the price of the bond with (the par value ) & the ytm & the coupon rate
1- if the ytm is less than the coupon rate so, the price of the bond will be less than its par value
2- if the ytm is equal to the coupon rate so, the price of the bond will be the same as its par value
3- the ytm represent the relation between the other 3 elements of the coupon whom are the rate of the coupon ,the price
the coupon & its par value
at (a,b,c) its shown the relationship between the price of the bond with (the par value ) & the ytm & the coupon rate
1- if the ytm is less than the coupon rate so, the price of the bond will be less than its par value
2- if the ytm is equal to the coupon rate so, the price of the bond will be the same as its par value
3- the ytm represent the relation between the other 3 elements of the coupon whom are the rate of the coupon ,the price
the coupon & its par value
m & the coupon rate

e
e of the coupon ,the price of