Financial Markets & Institutions
Bond Pricing Exercise
Homework Exercise 2
1) Calculate the Value of the Bonds under the following assumptions:
Assume that the principal amount for all bonds is $1000 and that interest is paid annually.
| Period 1 | ||||
| Initial Market Interest Rate = 3% | ||||
| Maturity (in Years) | ||||
| Coupon Rate | 3 | 15 | ||
| 3% | ||||
| 4% | ||||
| 5% | ||||
| Period 2 | Market Interest Rate changes to 4% | |||
| Maturity (in Years) | ||||
| Coupon Rate | 3 | 15 | ||
| 3% | ||||
| 4% | ||||
| 5% | ||||
| % Change in Value from Period 1 to 2 | ||||
| 3 Yr | 15 Yr | |||
| 3% coupon | ||||
| 4% coupon | ||||
| 5% coupon | ||||
2) An individual investor is considering two possible bonds. A Corporate Bond provides a current yield of 6%. A Municipal Bond provides a current yield of 3.5%. The investor pays a marginal federal tax rate of 30%. (Ignore state or city income taxes for this problem).
What are the current interest rates for the following?
| Instrument | Rate | Source of Information |
| Short Term Rates / Money Market | Ycharts.com | |
| 30 Day / 1 month T-Bills | 3.78 | |
| 90 Day / 3 month T-Bills | 4.06 | Ycharts |
| 1 Yr. T-Bills | 4.76 | https://ycharts.com/indicators/1_year_treasury_rate |
| US Commercial Paper (indicate term) | 4.27% on 3 month AA | ycharts |
| Overnight Repos | 3.82 | tradingeconomics.com |
| Federal Funds (indicate term) | 3.7-4 (3 month) | bankrate.com |
| Eurodollar Deposits (indicate term) | 0.16667 | fred.com |
| Euro CP (indicate term) | 1.87 | ecb.com |
| US Discount Rate | 4,00 | ychart |
| LIBOR (US$) (indicate term) | 5.45-1 year | bankrate.com |
| EURO LIBOR (Euribor) (indicate term) | 3.85-1 month | bankrate |
| Long Term Rates / Bond Market | ||
| 5 Yr. Treasury Notes | 4.33 | ychart |
| 10 Yr. Treasury Notes | 4.22 | ychart |
| 30 Yr. Treasury Bonds | 4.27 | ychart |
| 5 Yr. TIPS (Treasury Inflation Protected Securities) | 2.54 | ychart |
| US Agency Bonds, e.g. Fannie Mae, Freddie Mac, Ginnie Mae | 6.89 on 5 year | treasurydirect.com |
| US Corp Bonds – Investment Grade | 4.69 on 5 year | fred.com |
| US Corp Bonds – High Yield / Junk | 6.00 on 5 year | moneynews.com |
| Muni Bonds | 3.36 on 10 year | bloomberg.com |
Note the source(s) for your information. Also, you may want to indicate the term for bond rates if you find that the rates differ significantly depending on the maturity.
Plot the Yield Curve for US Treasuries. Putting Maturity on the X-axis and Yields on the Y-axis [ Suggest you use the Charting function in Excel and select the Scatter option ]
From the data above
| Maturity | Maturity | Yield |
| 30 Day / 1 month T-Bills | ||
| 90 Day / 3 month T-Bills | ||
| 1 Yr. T-Bills | ||
| 5 Yr. Treasury Notes | ||
| 10 Yr. Treasury Notes | ||
| 30 Yr. Treasury Bonds |
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