You are given the following data on bonds from AT&T, Dell, and IBM. Each bond ha

Question

You are given the following data on bonds from AT&T, Dell, and IBM. Each bond has a par value of $1000.
AT&T Dell IBM
Coupon 6.80 6.50 8.375%
Maturity 05/15/2036 04/15/2038 11/01/2019
Frequency Semiannual Semiannual Semiannual
Rating A A- A+
1. Calculate the value of the bond if your required return is 5 percent on AT&T, 6.5 percent on Dell, and 8 percent on IBM.
2. Determine the yield to maturity (YTM) on the bonds given the following prices.
AT&T Dell IBM
Price $1,060.00 $1,016.57 $1,307.78
3. Based on each bond’s ratings and your determination of its yield to maturity explain how you rank each bond for risk and return.
4. Assume you had $10,000 to invest. How many of each bond would you have? What dollar amount of interest would each bond return on the investment for the next year? What would your percentage return be for the year, that is, your interest payments divided by the total amount invested? You must submit your backup in Excel or other supporting documentation showing how answers were reached.

Explanation / Answer

1) Calculating the price of the bond using excel sheet: For AT&T: Semi-annual periods = 25yrs *2 = 50 periods Semi-annual coupon rate = 6.8% * $100 * (6/12) = $34 Step1: Go to excel and click "insert" to insert the function. Step2: Select the "PV" function as we are finding the present value of the bond in this case. Step3: Enter the values as Rate = 5% / 2 ; Nper = 50 ; PMT = -34; FV = -1000 Step4: Click "OK" to get the desired value. The value comes to "$1,255.26" For Dell: Semi-annual periods = 27yrs *2 = 54 periods Semi-annual coupon rate = 6.5% * $100 * (6/12) = $32.5 Step1: Go to excel and click "insert" to insert the function. Step2: Select the "PV" function as we are finding the present value of the bond in this case. Step3: Enter the values as Rate = 6.5% / 2 ; Nper = 54 ; PMT = -32.5; FV = -1000 Step4: Click "OK" to get the desired value. The value comes to "$1,000" When the coupon rate is equal to the required return, the present value is always equal to the face value of the bond. For IBM: Semi-annual periods = 8yrs *2 = 16 periods Semi-annual coupon rate = 8.375% * $100 * (6/12) = $41.875 Step1: Go to excel and click "insert" to insert the function. Step2: Select the "PV" function as we are finding the present value of the bond in this case. Step3: Enter the values as Rate = 8% / 2 ; Nper = 16 ; PMT = -41.875; FV = -1000 Step4: Click "OK" to get the desired value. The value comes to "$1,021.85" b) Calculating the YTM using excel sheet: For AT&T: Step1: Go to excel and click "insert" to insert the function. Step2: Select the "Rate" function as we are finding the yield of the bond in this case. Step3: Enter the values as Nper = 50 ; PMT = -34 ; PV = 1060; FV = -1000 Step4: Click "OK" to get the desired value. The value comes to "3.16%" Annual yield = 6.32% For Dell: Step1: Go to excel and click "insert" to insert the function. Step2: Select the "Rate" function as we are finding the yield of the bond in this case. Step3: Enter the values as Nper = 54; PMT = -32.5 ; PV = 1016.57; FV = -1000 Step4: Click "OK" to get the desired value. The value comes to "3.19%" Annual yield = 6.38% For IBM: Step1: Go to excel and click "insert" to insert the function. Step2: Select the "Rate" function as we are finding the yield of the bond in this case. Step3: Enter the values as Nper = 16 ; PMT = -41.875 ; PV = 1307.78; FV = -1000 Step4: Click "OK" to get the desired value. The value comes to "1.93%" Annual yield = 3.86% c) Rank based on Risk: IBM - AT&T- Dell Rank based on Return: Dell - AT&T - IBM d) It ll depends upon the risk-return profile of the investing person. If rating decreases, the YTM increases. IBM is the safest investment of all the three due to its bond rating of A+ but produces a YTM of 3.86% as against AT&T which has A rating and hs YTM of 6.327%

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