Below is the listing of a bond issued by Deere & Co. Below the detail of the bon

Question

Below is the listing of a bond issued by Deere & Co. Below the detail of the bond is the information on a recent sale of part of the bond issue.   

·      Explain what the price of 124.24 means in this purchase.

·      Explain how the yield to maturity of 3.299% is calculated.

·      Contrast that with the calculation of the current yield of 4.326%.

·      Explain why it matters to know if the bond pays interest monthly, semi-annually or annually.

·      This bond does not mature for almost 13 and half years. Explain the concept of interest rate risk in context with this bond for both the issuer and the investor.

Rating               Issuer – CUSIP               Coupon             Maturity                        Price                 Yield to Maturity           

A – Fitch           Deere & Co.                   5.375%              10/16/29                        124.24                      3.299%      

Current Yield                  Dated             Minimun Size                 Coupon Pd         Callable

    4.326%                      10/16/09                             1K                           Semi-Annual           No

Below is the listing of a bond issued by Deere & Co. Below the detail of the bond is the information on a recent sale of part of the bond issue.   

·      Explain what the price of 124.24 means in this purchase.

·      Explain how the yield to maturity of 3.299% is calculated.

·      Contrast that with the calculation of the current yield of 4.326%.

·      Explain why it matters to know if the bond pays interest monthly, semi-annually or annually.

·      This bond does not mature for almost 13 and half years. Explain the concept of interest rate risk in context with this bond for both the issuer and the investor.

Rating               Issuer – CUSIP               Coupon             Maturity                        Price                 Yield to Maturity           

A – Fitch           Deere & Co.                   5.375%              10/16/29                        124.24                      3.299%      

Current Yield                  Dated             Minimun Size                 Coupon Pd         Callable

    4.326%                      10/16/09                             1K                           Semi-Annual           No

Explanation / Answer

Question 1:

124.24 is quoted price. If we convert it into dollars we will get:

Dollar price = 1000 x (124.24)%

                       = 1,242.40

Question 2:

Since the bond is issued at a premium (price is greater than 1000), yield to maturity would be lower than coupon rate. Yield to maturity of 3.299% includes both coupon yield and capital loss due to bond premium.

Question 3:

Current yield = annual coupon/ price of the bond

                          = 1000 x 5.375% / 1242.40

                          = 4.326%

Current yield is calculated based on coupon yield only. Whereas yield to maturity captures both coupon yield and capital gain (loss)

Question 4

The frequency of coupon payment matters a lot for the investors as it changes the price of the bond. Also more frequent bonds have higher reinvestment risk as every time the investor receives a coupon, he has to think of investing it somewhere.

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.