buy at par Purchase Price Interest Sale Price Sum YTM 1994 -1000 -1000 10.25% buy at discount Purchase Price Interest Sale Price Sum YTM 1994 -900...

Question 2

Explain the calculations in each of the two panels below, one at a time. As in #1, consider the inputs and output – the results. Then, explain the difference between the two panels.

In panel 1 where price is given we use the IRR function in Excel to find the YTM percentage. The inputs are the sum of the cash flows which includes the purchase price and interest payments received.

In panel 2 where the required rate of return is given we use the NPV function of Excel to calculate the Net Present Value of the bond which is the amount the bond is valued at. This value determines the marketability of the bond whereas if the stock is priced less than the NPV the investor would purchase the bond and inversely if the bond was priced higher than the NPV the investor would not buy it.

The difference between the two panels is that they are analyzing the same scenario from two different perspectives – Yield to Maturity compared to Net Present Value. YTM provides insight on how the bond is priced compared to its par value while NPV provides insight on whether the bond should be purchased based on its expected returns.