5. Albertson, Inc., a food company, recently issued a 2-year note that pays a 3%

Question

5. Albertson, Inc., a food company, recently issued a 2-year note that pays a 3% coupon rate (paid annually) and expires on August 15, 2019. The current price of this note is 100-05 (in points and fractions)

a) What is this note’s yield to maturity? (Once again, use the “bond template” sheet available on Reggie Net, and assume that the bond’s settlement date is December 1, 2017)

b) It is now one year later and market yields for bonds/notes with similar characteristics have risen to 3.5%. What should now be the (dollar) price of the Albertson’s note? How do you explain the change of price from one year to the other?

Explanation / Answer

5. N = 2

FV = 1000

PV = -10*(100 + 5/32) = -1001.5625

PMT = 30

use rate function in Excel

a) yield to maturity = 2.9184%

b) now change the rate to 3.5%, n to 1 and calculate PV

price of the bond = 995.1691

Earlier the bond was a premium bond since the yield was higher than the coupon rate. As a year passed, the yield also increased, that caused the price of the bond to fall below the par value.

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