After completing the table of bond valuations I noticed some definite trends. Consider the AAA rated bond I chose in my valuation, yielding a 3.13% to maturity. As the remaining two bonds are BB and CCC, both have noticeably high yield to maturity percentages. In my observation, As the bond credit rating decreases, the yield to maturity percentage increases. The higher the yield, the more likely it is that the firm issuing the bond is not of high quality.(High/low yield bonds, 2006)
Coupon rate and the yield to maturity determine trade at a discount, premium, par.
Pertaining to the bonds in my valuation, the coupon rates and yield to maturity is established in such a way to influence bond perception. Premium sale of bonds are due to the coupon rate being established above the prevailing interest rate. Investors bid up the price in order to receive the benefit of a higher coupon rate. In a result, as the coupon rate attracts investors they are more willing to pay a “premium” for the bond. Once the bond matures, the investor will have received the stated coupon rate, but because of the increased initial payment for the bond the yield to maturity is lower over the life of the bond (Premium bond, 2003).
Yield to maturity, market value of the bonds if the time to maturity was increased decreased by 5 years?
As a bonds time to maturity increases, so does its yield to maturity. This is due to the issuer having the obligation to pay its coupon rates for an extended period of time.
a. The Yield to Maturity (YTM) is the nominal rate of return which investors would realize if they held the bond to maturity and the bond did not default.
1(a) Regular Treasury bonds are purchased at face value in the beginning or an adjusted price prior maturity. And in every period, normally annul or semiannual, investor will receive a coupon as an interest and at the maturity a principal plus coupon.
The yield to maturity on a 15-year bond is a true estimate of the cost of 30-year bond
Inflation rate risk, when inflation goes up, the price of the bond usually goes down.
So if we start to compare the separate bonds that are presented by these two powerhouse companies we can see that they both have a maturity date of 30 years for a face value of $1,000 and the coupon type is fixed. The coupon rate is less than the current interest rate which means a buyer may want to pay less for that bond. However there are some differences such as the issue size of the two bonds. Apple
b. Generate a graph or table showing how the bond’s present value changes for semi-annually compounded interest rates between 1% and 15%.
Nominal Yield (Coupon Rate). The interest rate defined on the coupon. This is generally the interest rate you receive if: you acquired the bond at par (that is, at neither a discount nor a premium to its par value) there is no call feature on the bond you don't reinvest coupon payments and, you are resolved to hold the bond until maturity. In reality, it is almost certainly not your actual interest rate. Current Yield. Factors in the bond's market price, which is generally not the same as par value. Yield to Maturity. Considers the current market price, the coupon rate and the time to maturity and assumes that interest payments are reinvested at the bond's coupon rate. This is the most accurate, and most widely quoted, measure of return on a
High risky bonds should provide higher return according with the risk related to the company. Also bonds are less risky than equity issued by the same company as in case of insolvency of an organization debt holders paid first and only after shareholders. Table 3 clearly illustrates that yield return increases according to risk, where government bonds are equalized to free risk issues (Davis, 2012). Corporate bonds yield coupon rate might fluctuate depending on rating of the company that reflects risk of the company. Investors also can gain or lose by selling bond in secondary market.
Will the bonds get an investment grade rating? How can they improve the probability of getting an investment grade?
coupon date. In both cases use the same price. Is the bond yield the same as in
2d. In comparing bond yields with the yields on other securities, should the nominal or effective YTM be used? Explain. • The most important rate of return indicator is a bond's yield to maturity. The YTM factors in everything to give the true overall yield to an investor. It examines the nominal yield, current yield and years to maturity. The overall rate of return can be effected by the length of time the bond is held. 3. Suppose TECO has a second bond with 25 years left to maturity (in addition to the one listed in Table 1), which has a coupon rate of 7 3/8 percent and a market price of $747.48 3a. What is the (1) nominal yield and (2) the effective annual YTM on this bond?
5. Consider the decision to purchase either a 5-year corporate bond or a 5-year municipal bond. The corporate is a 12% annual coupon bond with a par value of $1000. It is currently yielding 11.5%. The municipal bond has an 8.5% annual coupon and a par value of $1000. It is currently yielding 7%.
A bond is debt to whoever sells the bond to an inventor. If you buy an IBM bond, you are loaning money ($1000) to IBM instead of a bank loaning money to them. Just like a bank, you are going to charge IBM interest on your money, as well as a return of principle when the loan is due (ten years later). The company does not go to the bank to borrow the money, because the bank will rate the company as a high risk company. Hence, banks are really tight with their money. High yields bond investment relies on an credit analysis in that it concentrates on issuer fundamentals, and a "bottom-up" process. It focuses more on "downside risk default and the unique characteristics of the issuer. In a portfolio of high yield bonds,
All else equal, which bond’s price is more affected by a change in interest rates, a short-term bond or a longer-term bond? Why?