3. You are considering the following bonds to include in your portfolio: Bond 1o

Question

3. You are considering the following bonds to include in your portfolio: Bond 1ond 2Bond 3 $900.00$1,100.00 S1,000.00 S1,000.00 S1,000.00 S1,000.00 Price Face Value Coupon Rate | 7.00% | 10.00% | 9.00% Frequency Maturity (Years)15 Required Return | 9.00% 4 30 20 | 8.00% | 9.00% a. Determine the highest price you would be willing to pay for each of these bonds. b. Determine the yield to maturity and the current yield of each bond. Please solve using Excel functions Thank you and will leave a rating

Explanation / Answer

a.

Assuming we don’t have price of the bond and Yield mentioned in table stands correct then, I would like to purchase bond at below mentioned price:

Bond 1:

=PV(9%,15,-70,-1000)

= $838.79

Bond 2:

=PV(8%/2,40,-50,-1000)

=$1,197.93

Bond 3:

=PV(9%/4,120,-22.5,-1000)

=$1,000

Above are the highest price of the bond should be paid

b.

Assuming we have bond, price mentioned correctly in the give table and yield is not given then correct yield is:

Bond 1:

=RATE(15,-70,900,-1000)

= 8.18%

Bond 2:

=RATE(40,-50,1100,-1000)*2

= 8.92%

Bond 3:

=RATE(120,-22.5,1000,-1000)*4

= 9.00%

Above are YTM or Yield to maturity for each bond

Now, current yield calculation:

Current yield = Coupon rate yearly / Bond price mentioned in table

Bond 1:

Current yield = 70/900 = 7.78%

Bond 2:

Current yield = 100/1100 = 9.09%

Bond 3:

Current yield = 90/1000 = 9.00%

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