Diana Voorman, portfolio manager at Gigantico Inc. is looking at two different b
ID: 2784111 • Letter: D
Question
Diana Voorman, portfolio manager at Gigantico Inc. is looking at two different bonds and intends to purchase only one of them for her firm's intermediate bond portfolio. The first bond is from The Zelio Film Company.
* The ask price is 102.50 firm.
* The bond was issues on November 15th, 2010 and matures on November 15th, 2025.
* The bond has a coupon rate of 9.25% payable on a semiannual basis.
* The face value of the bonds is $10,000 and the required rate of return for similar bonds is 9.10% as determined by Diana's investment committee.
* If purchased, the bond would settle on May 1st, 2017.
a) Analyze the bond and calculate its respective intrinsic values. Use the Excel "Formulas" then "Financial" drop down menu, use the PRICE function to solve for the intrinsic value.
b) With the expected settlement date of May 1st, 2017, calculate the amount of accrued interest that Gigantico would pay upon acquiring the bond. Alas, the Excel function here requires manipulating the date format and a workaround, so the recommendation is to manually calculate being aware of the "Basis" information and when the bond was issued, or last paid interest.
c) Evaluate the bonds and determine the yield to maturity of both bonds based on the current price for the bonds.
Provide Excel syntax (formulas)
Explanation / Answer
A) Time to Maturity = 15 years
Coupon rate=9.25%
ROR= 9.10%
FV= $10000
Price of Bond= PV(9.10%,15,$10000*9.25%)
= ($7412.32)
B) Issue date =15 nov 2010
Mature date = 15 nov 2025
Settlement date = 01 may 2017
Value=$10000
Rate=9.25%
Frequency=2(Semi annual Basis)
Accured interest= ACCRINT(15nov2010,15nov2025,01may2017,9.25%,$10000,2)
=5976.52
c) In both the parts above
the price of bond =($7412.32)
and the accured interest = 5976.52
It can be easily evaluated that the prices are decreasing...
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