15 - 1

Bonds

15
& SF

Chapter 15

McGraw-Hill Ryerson

15 - 2

Bonds

15

A $5,000 face value bond has a coupon rate

of 6.6% and a maturity date of March 1, 2018.
LO 1.
Interest is paid semi-annually. On September 1,
2002, the prevailing interest rate on long-term bonds abruptly
rose from 6% to 6.2% compounded semi-annually.
What were the bond's prices before and after the interest rate
FV = 5000change?
b = 6.6%/2
& SF

September 1, 2002 = interest payment date

15.5 years remain until maturity

15.5 ** 22 == 31
31
nn == 15.5
The semi-annual
semi-annual interest
interest paid
paid on
on the
the bond
bond isis
The
b(FV) == 0.033
0.033 ($5,000)
($5,000) == $165
$165
b(FV)

Calculation
McGraw-Hill Ryerson

15 - 3

Bonds

15
& SF

$5,000face
facevalue
value
AA$5,000
bondhas
hasaacoupon
couponrate
rate
bond
6.6%and
andaa
ofof6.6%
maturitydate
dateofofMarch
March
maturity
2018.
1,1,2018.
Interestisis
Interest
paidsemi-annually.
semi-annually.On
On
paid
September1,1,2002,
2002,the
the
September
prevailinginterest
interestrate
rate
prevailing
onlong-term
long-termbonds
bonds
on
abruptly
abruptly
rosefrom
from6%
6%toto6.2%
6.2%
rose
compoundedsemisemicompounded
annually.What
Whatwere
werethe
the
annually.
bond'sprices
pricesbefore
beforeand
and
bond's
afterthe
theinterest
interestrate
rate
after
change?
change?

McGraw-Hill Ryerson

Calculate the bond price before

the market rate increase.

15 - 4

Bonds

15
& SF

$5,000face
facevalue
value
AA$5,000
bondhas
hasaacoupon
couponrate
rate
bond
6.6%and
andaa
ofof6.6%
maturitydate
dateof
ofMarch
March
maturity
2018.
1,1,2018.
Interestisis
Interest
paidsemi-annually.
semi-annually.On
On
paid
September1,1,2002,
2002,the
the
September
prevailinginterest
interestrate
rate
prevailing
onlong-term
long-termbonds
bonds
on
abruptly
abruptly
rosefrom
from6%
6%toto6.2%
6.2%
rose
compoundedsemisemicompounded
annually.What
Whatwere
werethe
the
annually.
bond'sprices
pricesbefore
beforeand
and
bond's
afterthe
theinterest
interestrate
rate
after
change?
change?

McGraw-Hill Ryerson

Calculate the bond price after

the market rate increase.

Bonds

15
& SF

LO 2.

Calculatingthe
the
Calculating
Yield-tto-Maturity
o-Maturityof
ofaa
YieldBond
Bond

The bonds yield-to-maturity is the

discount rate that makes the
combined

PV of all remaining interest payments

and the Face Value
equal to
the bonds Market Value

McGraw-Hill Ryerson

15 - 5

Bonds

Calculatingthe
theYieldYield-tto-Maturity
o-Maturity
Calculating
ofaaBond
Bond
of

15
& SF

15 - 6

A $1,000 face value Province of Manitoba bond, bearing

interest at 5.8% payable semiannually, has 11 years
remaining until maturity. What is the bonds yield to
maturity (YTM) at its current market price of $972?

McGraw-Hill Ryerson

Bonds

PricingaaBond
Bond
Pricing
between
between
InterestPayment
PaymentDates
Dates
Interest

15
& SF

A $1,000, 20 year, 6% coupon bond was issued on

August 15, 2000. It was sold on Nov 3, 2002 to yield
the purchaser 6.5% compounded semiannually until
maturity. At what price did the bond sell?

Calculatethe
thePV
PVof
ofthe
theremaining
remaining
Calculate
paymentson
onthe
thepreceding
precedinginterest
interest
payments
paymentdate.
date.
payment
Calculatethe
theFV
FVof
ofthe
theStep
Step11result
resulton
on
Calculate
thedate
dateof
ofsale.
sale.
the
McGraw-Hill Ryerson

15 - 7

Bonds

PricingaaBond
Bondbetween
between
Pricing
InterestPayment
PaymentDates
Dates
Interest

15
& SF

15 - 8

A $1,000, 20 year, 6% coupon bond was issued

on August 15, 2000. It was sold on Nov 3, 2002 to yield
the purchaser 6.5% compounded semiannually until
maturity. At what price did the bond sell?

Most
Most
recent
recent
interest
interest
payment
payment
date is
is
date
August 15,
15,
August
2002
2002
McGraw-Hill Ryerson

OnAugust
August15,
15,2002,
2002,the
thebonds
bondsvalue
valueisis
On
$947.40
$947.40

Bonds

15
& SF

PricingaaBond
Bondbetween
between
Pricing
InterestPayment
PaymentDates
Dates
Interest

15 - 9

A $1,000, 20 year, 6% coupon bond was issued

on August 15, 2000. It was sold on Nov 3, 2002 to yield
the purchaser 6.5% compounded semiannually until
maturity. At what price did the bond sell?

Calculate the FV of $947.40 on Nov.3, 2002

Weneed
needto
tofind:
find:
We
a)##of
ofdays
daysbetween
betweeninterest
interestpayment
paymentdates,
dates, and
and
a)
b)##of
ofdays
daysfrom
fromAug.15
Aug.15totoNov.3
Nov.3
b)
McGraw-Hill Ryerson

Bonds

15
& SF

Using

Texas Instruments

Calculate
the time from
Aug.
15th to Nov. 3rd
DBD = 80
the time from
Aug. 15th,2002 to
Feb. 15th,2003
DBD = 184
McGraw-Hill Ryerson

15 - 10

BAII PLUS

Bonds

15
& SF

PricingaaBond
Bondbetween
between
Pricing
InterestPayment
PaymentDates
Dates
Interest

15 - 11

A $1,000, 20 year, 6% coupon bond was issued

on August 15, 2000. It was sold on Nov 3, 2002 to yield
the purchaser 6.5% compounded semiannually until
maturity. At what price did the bond sell?

Thebond
bondsold
soldfor
for$960.67
$960.67on
onNov.3,
Nov.3,2002
2002
The
McGraw-Hill Ryerson