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A client of Mr. Richards wants to purchase one of three bonds: a) 10-year corporate bond with a 2.00% coupon, paying annually, and par value of...
A client of Mr. Richards wants to purchase one of three bonds:
a) 10-year corporate bond with a 2.00% coupon, paying annually, and par value of $1,000.
b) 7-year corporate bond with a 1.75% coupon, paying annually and par value of $1,000.
c) 5-year corporate bond with a 1.50% coupon, paying annually and par value of $1,000.
What are the current prices for each of these bonds? How will the value of these bonds change if the respective market rates increase by 50 basis points? How will the value of these bonds change if their respective market rates decrease by 50 basis points? What recommendation would you make about purchasing one of these three bonds? Would you suggest any further analysis that might include the use of a relative interest rate risk measure used for bonds?
Excel: Using the Basic TVM setup, calculate the value of these bonds, where FV is the par value, payment is the current coupon (rate * par / payment frequency), PV is the current price, rate is the current market rate or in this case the coupon and rate changes, NPR is the years * M. For the rate changes, literally, copy the three bonds and then change the Rate to +/- .005 or 50 BPS. Setup a summary to show the average sensitivity of each bond and for the rate changes. Include this summary in the written analysis.
