1. Pick current business or economic news related to Business cycles and implications on Bonds and Bond funds In reference to bonds; what is credit risk and what is interest rate risk? Which are ri

Week 4 Assignment (100 points)

Learning Outcome: Fundamentals of Bonds

1. Describe following for Bonds : ( 10 points)

   1. coupon rate

   2. current yield

   3. Yield to maturity

2. Which ones of the above rates/yield can change over the life of the bond and if yes, why? ( 10 points)

3. Research and find a bond for large blue chip company like McDonald, Intel, GE or any other from Dow Jones 30 list. Provide following ( and list source) ( 20 points)

   1. Bond information : Company, rating

   2. Maturity date

   3. Current price

   4. Coupon rate %

   5. Current yield %

   6. Yield to Maturity (YTM)

1. if overall interest rates in the economy start to go up, what will happen to the price of the bonds? Explain? ( 10 points)

1. What is a callable bond and in what type of interest environment would the lenders exercise the call option on the bond and why? ( 10 points)

EXCEL EXCERCISES:

1. Calculate Bond price : ( 10 points)

• Par Value : $ 1000

• Coupon rate : 3 % ( paid annually)

• Yield to maturity rate (YTM) : 5 %

• Time to maturity 10 years

1. Calculate Bond price : ( 10 points)

   1. In reference to problem above, If borrower (corporation) has financial issues and the company gets downgraded by rating agencies (like Moody’s or Fitch) and the YTM goes up to 6 %. Calculate the price of the bond with this higher risk situation ( hence higher YTM)

1. Calculate expected rate ( Yield to maturity) : ( 10 points)

• Bond Price : 900

• N= 10 years

• Coupon rate : 6 % ( Annual payments)

• Par Value : 1000

• YTM: ? ( Hint Use “RATE” from Excel financial formulas)