Solve in Excel You are considering an investment in the bonds of the Front Range Electric Company. The bonds pay interest semiannually, will mature in 15 years, and have a coupon rate of 6% on a face value of $1,000. Currently, the bonds are selling for $920. If your required return is 6.80% for bonds in this risk class, what is the highest price you would be willing to pay? (Use the PV function) What is the current yield of these bonds? What is the yield to maturity on these bonds if you purchase them at the current price? (Use the Rate function) If you hold the bonds for one year, and interest rates do not change, what total rate of return will you earn, assuming that you pay the market price? Why is this different from the current yield and YTM? If the bonds can be called in three years with a call premium of 4% of the face value, what is the yield to call? (Use the Rate function) Now assume that the settlement date for your purchase is 07/30/2020, the price maturity date is 07/30/2035, and the first call date is 07/30/2023. Using Price and Yield recalculate your answers to parts a, c, and d. If market interest rates remain unchanged, do you think it is likely that the bond will be called in three years? Why or why not? Create a chart that shows the relationship of the bond’s price to your required return. Use a range of 0% to 15% in calculating the prices.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter6: Fixed-income Securities: Characteristics And Valuation

Section: Chapter Questions

Problem 4P

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***Solve in Excel

You are considering an investment in the bonds of the Front Range Electric Company. The bonds pay interest semiannually, will mature in 15 years, and have a coupon rate of 6% on a face value of $1,000. Currently, the bonds are selling for $920.

If your required return is 6.80% for bonds in this risk class, what is the highest price you would be willing to pay? (Use the PV function)

What is the current yield of these bonds?

What is the yield to maturity on these bonds if you purchase them at the current price? (Use the Rate function)

If you hold the bonds for one year, and interest rates do not change, what total rate of return will you earn, assuming that you pay the market price? Why is this different from the current yield and YTM?

If the bonds can be called in three years with a call premium of 4% of the face value, what is the yield to call? (Use the Rate function)

Now assume that the settlement date for your purchase is 07/30/2020, the price maturity date is 07/30/2035, and the first call date is 07/30/2023. Using Price and Yield recalculate your answers to parts a, c, and d.

If market interest rates remain unchanged, do you think it is likely that the bond will be called in three years? Why or why not?

Create a chart that shows the relationship of the bond’s price to your required return. Use a range of 0% to 15% in calculating the prices.

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d. If you hold the bonds for one year, and interest rates do not change, what total rate of return will you earn, assuming that you pay the market price? Why is this different from the current yield and YTM?

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e. If the bonds can be called in three years with a call premium of 4% of the face value, what is the yield to call? (Use the RaTe function.)

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