Peachtree Securities Inc.
Peachtree Securities Inc.
Diane Carumay Tiffany Ching Melvin Catarroja Jr. Aissa Valerie Sicio Abelardo
Bea Jr.
The Case:
Laura Donahue
Assignment
Strategies
Prepare a seminar
explaining valuation
process to the customers
Challenges deep-dive
Statement of the Problem
Question 1
Scenario
To begin, assume that it
is now January 1, 1993,
and that each bond in
Table 1 matures on
December 31 of the year
listed. Further, assume
that each bond has a
$1000 par value, each
had a 30-year maturity
when it was issued, and
the bonds currently have
a 10% required nominal
rate of return.
Question 1
Scenario
b.) What would be the value of each bond if they had annual
coupon payments?
Excel formula to get PV: =PV(rate, nper,pmt,[fv])
Mat
urity
Year
Required
Nominal
Rate of
Return
Cou
pon
Rate
Par
Valu
e
(FV)
Year
s to
Mat
urity
199
7
10%
4.50
0%
$1,0
00.0
0
Pay
men
t
$45.
00
Bon
d
Valu
e
(PV)
$79
1.51
c.) TECOs bonds, like virtually all bonds, actually pay interest
$1,0
15
$86
00.0
What
is $82.
the 6.89
each bonds value under these
0
50
conditions? Are the bonds currently selling at a discount or at
201
10%
12.6 $1,0
25
$1,2
a premium?
200
10%
8.25
7
0%
semiannually.
7
Mat
urity
Year
199
7
Required
Nominal
Rate of
Return
5%
25%
Cou
pon
Rate
00.0
0
Par
Valu
e
(FV)
2.25
0%
$1,0
00.0
Year
s to
Mat
urity
10
$12
6.25
Pay
men
t
38.2
7
Bon
d
Valu
e
(PV)
22.5
$78
7.65
Question 1
Scenario
To begin, assume that it
is now January 1, 1993,
and that each bond in
Table 1 matures on
December 31 of the year
listed. Further, assume
that each bond has a
$1000 par value, each
had a 30-year maturity
when it was issued, and
the bonds currently have
a 10% required nominal
rate of return.
Excel
Terms to remember:
10%
10.25%
Question 1
Scenario
To begin, assume that it
is now January 1, 1993,
and that each bond in
Table 1 matures on
December 31 of the year
listed. Further, assume
that each bond has a
$1000 par value, each
had a 30-year maturity
when it was issued, and
the bonds currently have
a 10% required nominal
rate of return.
Required Cou
Nominal pon
Rate of Rate
Return
Par
Valu
e
(FV)
Year
s to
Mat
urity
Pay
men
t
Bon
d
Valu
e
(PV)
Mat
urity
Year
Required Cou
Nominal pon
Rate of Rate
Return
Par
Valu
e
(FV)
Year
s to
Mat
urity
Pay
men
t
Bon
d
Valu
e
(PV)
$1,0
00.0
0
199
7
10%
4.50
0%
$45.
00
$79
1.51
2.25 is$1,0
10
$22. $78RELATED the maturity and
Bond5%value
INVERSELY
0% 00.0
50
7.65
0 compounding period
199
7
Question 2
Scenario
Now, regardless of your
answers to Question 1,
assume that the 5-year
bond is selling for
$800.00, the 15-year
bond is selling for
$865.49 and the 25-year
bond is selling for
$1,220.00. (Note: Use
these prices, and
assume semiannual
coupons for the
remainder of the
questions).
2.2
5%
4.1
Year
s to
Matu
rity
(Peri
ods)
Pay
men
t
Valu
e of
Bon
d
(PV)
10
$1,
000
$22. $800
50
.00
30
Nomi
nal
Semi
Annu
al
YTM
No
min
al
Ann
ual
YT
M
4.82
%
9.6
3%
5.00
10.
Question 2
Scenario
Now, regardless of your
answers to Question 1,
assume that the 5-year
bond is selling for
$800.00, the 15-year
bond is selling for
$865.49 and the 25-year
bond is selling for
$1,220.00. (Note: Use
these prices, and
assume semiannual
coupons for the
remainder of the
questions).
Yea
rs
to
Mat
urit
y
(Pe
riod
s)
2.2
10
5%Yield
$1, to
00
0
Pa
ym
ent
Valu No No Eff
e of min min ecti
Bon
al
al
ve
d
Se Ann YT
(PV miA ual
M
)
nnu YT
al
M
YT
M
$22 $80
Maturity
.50 0.00
4.8
2%
to
9.6 9.8
3% used
7%
be
in comparing securities
Terms to remember:
4.1
30
5.0 10. 10.
3% $1,
$41 $86 0% 00
25
Yield 00
- amount of.25
return
will
5.49on investment
%
% realize on a security, in this case, a
bond. 0
6.3
50
$1,2 5.0 10. 10.
Yield
to
Maturity
(YTM)
(interest
1% $1,
$63 20.0- the
9%rate18
44 rate) effective (inclusive of gains and
loss) of
until maturity
00the bond.13
0
%
%
0
Question 3
Scenario
a.) What is (1) the nominal yield and (2) the effective annual
YTM on this bond?
Nominal YTM - coupon rate of the bond = 7 percent
Terms to remember:
Current Yield - annual interest
paymet divided by bonds current
price
Coup
on
Rate
Paym
ent
Market
Value
(PV)
Par
Value
(FV)
YTM
25
7.38
%
10.2
Curr
0%
ent
Yield
73.75
747.4 price
1,000 9.87
Bonds
=
8
%
Bonds value
Question 3
Scenario
Req
uire
d
Co Par
No
up Val
min
on ue
al
Rat (FV
Rat
e
)
e of
Ret
urn
Terms to remember:
10.
18
%
4.5 100
0%
0
Y
for
19
93
Y1
for
19
94
Bon Bon
d
d
Valu Valu
Pay
e
e
me
(PV (PV
nt
at
at
199 1994
3)
)
45
12.
63
%
100
0
7.3
100
25
24
$78 $820
5.67 .65
Change '93 - '94
$85 $859
4.70 .21
$1,2
126
18.9
.25
0
$34.98
$1,2
16.7
3
4.45%
73.
$4.51
$751
0.53%
$74
Question 3
Scenario
Question 3
Scenario
Supposed 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
percent and a market
price of $747.48.
Question 4
Scenario
Question 4
Scenario
Consider the riskiness of
the bonds
c.) Assume that you bought 5-year, 15-year and 25-year bonds
all with a 10% coupon rate and semiannual coupons, at their
$1,000 par values. Which bonds value would be most affected
if interest rates rose to 13%? Which would be least affected?
If you are using the Lotus modem, calculate the new value of
each bond.
Re
quir
ed
No
min
al
Rat
e
of
Ret
urn
Co
up
on
Ra
te
@
10
%
Co
up
on
Ra
te
@
10
%
P
a
r
V
al
u
e
(
F
V
)
M
at
uri
ty
P
M
T
@
10
%
P
M
T
@
13
%
BV
@
10
%
BV
@
13
%
%
DI
FF
5.0
0%
6.5
0%
1
0
0
0
30
50
65
5
28.
65
6
23
changes.
70. .5
06
9
%
Question 4
Scenario
Consider the riskiness of
the bonds
YEAR 5
YEAR
10
YEAR
15
YEAR
20
YEAR 25
ONE INTEREST REINVESTMENT
YEAR
25
Question 4
Scenario
Consider the riskiness of
the bonds
Question 5
Scenario
Req
uire
d
Co Par
No
up Val
min
on ue
al
Rat (FV
Rat
e
)
e of
Ret
urn
10
8.2
100
Bon Bon
Yd
d
Ma
Pay
5
Valu Valu
tur
me
for
e@ e@
e Proposed
nt
> calculated
bond value
5th
Mat
5th
ure Loss
year of $157.53
Borrower
$82
$86
$892
Solution
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The team
CEO
Jude Parker
Dir. of Sales
Dir. of
Engineering
Ashton Smith
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North America
Lead
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Ashley Smith
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max growth
Impact
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