2012136_Ankit Garg_Fixed Income Valuation Cases

Answer 1

Part B

Part A

Year to maturity Coupon Rate Face Value Frequency Interest PMT Quoted Price YTM

10 4.75% 100 1 4.75 -100 4.750%

Year to maturity

8

Yields Coupon Rate Settlement Date Maturity Date Redemption Frequency Basis

3% 4.75% 20-Dec-96 20-Dec-04 100 1 4

Price Year to maturity Coupon Rate Face Value Frequency Interest PMT Quoted Price YTM

10 4.75% 100 1 4.75 -99 4.879%

Year to maturity Coupon Rate Face Value Frequency Interest PMT Quoted Price YTM

10 4.75% 100 1 4.75 -101 4.623%

112.2844613

Answer 2 Part A

Year to maturity Coupon Rate Frequency Face value YTM

5 9% semiannualy 2 1000 4%

Time Period Discount factor Cash Flow Price of BOND A

1 2 3 4 5 6 7 0.96153846 0.924556 0.888996 0.854804 0.821927 0.790315 0.759918 43.2692308 41.60503 40.00484 38.46619 36.98672 35.56415 34.1963 1040.55448

Year to maturity Coupon Rate Frequency Face value YTM Time Period Discount factor Cash Flow Price of BOND B

10 4% semianually 2 1000 4% 1 2 3 4 5 6 7 0.96153846 0.924556 0.888996 0.854804 0.821927 0.790315 0.759918 38.4615385 36.98225 35.55985 34.19217 32.87708 31.61258 30.39671 1000

Future Value Time to maturity YTM Price of BOND C

1000 20 4% Semiannually 456.386946

Part B

Year to maturity Coupon Rate Interet payment Face Value Quoted Price Frequency YTM

10 8% 80.00 1000 -990 1 8.150%

8 9 10 0.73069 0.702587 0.675564 32.88106 31.6164 705.9646

8 9 10 11 12 13 14 15 16 0.73069 0.702587 0.675564 0.649581 0.624597 0.600574 0.577475 0.555265 0.533908 29.22761 28.10347 27.02257 25.98324 24.98388 24.02296 23.099 22.21058 21.35633

17 18 19 20 0.513373 0.493628 0.474642 0.456387 20.53493 19.74512 18.9857 474.6424

Answer 3 Payment Period

Part A

0

Interest Rate Pre tax payment Time Mortgage amount

9% 25000 20 228213.6417

1st Year Interest Total Interest Principal paid in 1st yea

20539.22776 271786.3583 4460.772245

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Time Period (years)

Discount factor Cash Flow

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

0.917431193 0.841679993 0.77218348 0.708425211 0.649931386 0.596267327 0.547034245 0.50186628 0.46042778 0.422410807 0.38753285 0.355534725 0.326178647 0.299246465 0.274538041 0.251869763 0.231073177

22935.7798 21041.9998 19304.587 17710.6303 16248.2847 17888.0198 16411.0273 15055.9884 13812.8334 12672.3242 13563.6498 12443.7154 11416.2526 10473.6263 9608.83145 10074.7905 9242.92707

Mortgage Amount

273301.8398

18 19 20

0.21199374 8479.74961 0.19448967 7779.58679 0.17843089 7137.23559

Part A - Amortization Schedule Payment

Interest Rate

Interest Amount

Principal Repaid

9%

Balance

228213.6417

25000 25000 25000 25000 25000 25000 25000 25000

9% 9% 9% 9% 9% 9% 9% 9%

20539.2278 20137.7583 19700.1565 19223.1706 18703.2559 18136.5490 17518.8384 16845.5338

4460.7722 4862.2417 5299.8435 5776.8294 6296.7441 6863.4510 7481.1616 8154.4662

223752.8695 218890.6277 213590.7842 207813.9548 201517.2107 194653.7597 187172.5980 179018.1319

25000 25000 25000 25000 25000 25000 25000 25000 25000 25000 25000 25000

9% 9% 9% 9% 9% 9% 9% 9% 9% 9% 9% 9%

16111.6319 15311.6787 14439.7298 13489.3055 12453.3430 11324.1439 10093.3168 8751.7153 7289.3697 5695.4130 3958.0002 2064.2202

8888.3681 9688.3213 10560.2702 11510.6945 12546.6570 13675.8561 14906.6832 16248.2847 17710.6303 19304.5870 21041.9998 22935.7798

170129.7637 160441.4425 149881.1723 138370.4778 125823.8208 112147.9647 97241.2815 80992.9968 63282.3665 43977.7795 22935.7797 -0.0002

Part B Amortization Schedule Payment Period

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Payment

25000 25000 25000 25000 25000 30000 30000 30000 30000 30000 35000 35000 35000 35000 35000 40000

Interest Rate

Interest Amount

9% 9% 9% 9% 9% 9% 9% 9% 9% 9% 9% 9% 9% 9% 9% 9% 9%

24597.1656 24560.9105 24521.3924 24478.3177 24431.3663 24380.1893 23874.4064 23323.1029 22722.1822 22067.1786 21353.2247 20125.0149 18786.2662 17327.0302 15736.4629 14002.7446

Principal Repaid

402.8344 439.0895 478.6076 521.6823 568.6337 5619.8107 6125.5936 6676.8971 7277.8178 7932.8214 13646.7753 14874.9851 16213.7338 17672.9698 19263.5371 25997.2554

Balance

273301.8398 272899.0054 272459.9159 271981.3083 271459.6260 270890.9924 265271.1817 259145.5881 252468.6910 245190.8732 237258.0517 223611.2764 208736.2913 192522.5575 174849.5877 155586.0506 129588.7951

17 18 19 20

40000 40000 40000 40000

9% 9% 9% 9%

11662.9916 9112.6608 6332.8003 3302.7523

28337.0084 30887.3392 33667.1997 36697.2477

101251.7867 70364.4475 36697.2477 0.0000

Answer 4

Parts A and B Pru Johntower

Time to maturity Coupon Rate Face value Quoted price Final Amount Effective YTM

Tom Pa

15 10% 10000000 10000000 41772481.69 10.00%

Time to maturity Coupon Rate Face value Quoted price Final Amount Effective YTM

Part C

The reason for insurance companies demanding a higher effective annual yield for coupon bonds is the reinvestment risk. The risk is that the insurance companies may not be able to reinvest the coupon payments at the prevailing interest rates. The companies expect the interest rates to drop. To cover this risk, the insurance companies ask for higher effective yields for coupon yielding bonds.

ine

15 9.7200% Compounded monthly 10000000 10000000 42721909.3 10.165%

Answer 5 Part A

Total Amount Issued at par value Interest rate Tax rate Period (in years) Quoted price PMT Cost of Debt After tax cost of debt

Part B

$150 million 100 6.625% 35.000% 10 -100 6.625 6.625% 4.3063%

Year Tax savings 1 2 3 4 5 6 7 8

6459375 6459375 6459375 6459375 6459375 6459375 6459375 6459375

9 10 PV

6459375 6459375 51601622.13

Answer 6 Part B

Cash Inflow Tenure (yrs) Interest Frequency Yield to Maturity PV(tax savings)

1000 30 7.25% 2 9% 287

year

CF

df

df x CF

Tax

1 2 3 4

36.25 36.25 36.25 36.25

0.96 0.92 0.88 0.84

34.69 33.20 31.77 30.40

13 13 13 13

5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42

36.25 36.25 36.25 36.25 36.25 36.25 36.25 36.25 36.25 36.25 36.25 36.25 36.25 36.25 36.25 36.25 36.25 36.25 36.25 36.25 36.25 36.25 36.25 36.25 36.25 36.25 36.25 36.25 36.25 36.25 36.25 36.25 36.25 36.25 36.25 36.25 36.25 36.25

0.80 0.77 0.73 0.70 0.67 0.64 0.62 0.59 0.56 0.54 0.52 0.49 0.47 0.45 0.43 0.41 0.40 0.38 0.36 0.35 0.33 0.32 0.30 0.29 0.28 0.27 0.26 0.24 0.23 0.22 0.21 0.21 0.20 0.19 0.18 0.17 0.16 0.16

29.09 27.84 26.64 25.49 24.39 23.34 22.34 21.38 20.45 19.57 18.73 17.92 17.15 16.41 15.71 15.03 14.38 13.76 13.17 12.60 12.06 11.54 11.05 10.57 10.11 9.68 9.26 8.86 8.48 8.12 7.77 7.43 7.11 6.81 6.51 6.23 5.96 5.71

13 13 13 13 13 13 13 13 13 13 13 13 13 13 13 13 13 13 13 13 13 13 13 13 13 13 13 13 13 13 13 13 13 13 13 13 13 13

43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60

36.25 0.15 36.25 0.14 36.25 0.14 36.25 0.13 36.25 0.13 36.25 0.12 36.25 0.12 36.25 0.11 36.25 0.11 36.25 0.10 36.25 0.10 36.25 0.09 36.25 0.09 36.25 0.09 36.25 0.08 36.25 0.08 36.25 0.07 1036.25 0.07

5.46 5.23 5.00 4.79 4.58 4.38 4.19 4.01 3.84 3.68 3.52 3.37 3.22 3.08 2.95 2.82 2.70 74 819

13 13 13 13 13 13 13 13 13 13 13 13 13 13 13 13 13 363

PV(tax savings)

12.14 11.62 11.12 10.64 10.18 9.74 9.32 8.92 8.54 8.17 7.82 7.48 7.16 6.85 6.56 6.27 6.00 5.74 5.50 5.26 5.03 4.82 4.61 4.41 4.22 4.04 3.87 3.70 3.54 3.39 3.24 3.10 2.97 2.84 2.72 2.60 2.49 2.38 2.28 2.18 2.09 2.00

1.91 1.83 1.75 1.68 1.60 1.53 1.47 1.40 1.34 1.29 1.23 1.18 1.13 1.08 1.03 0.99 0.95 25.86 286.80