Bond Yields - Any Commerce or Accounting Types out there...

[TJ in the 'Peg]

Feel like brushing up on some math? I am taking a course in Corporate Finance and am stumped by a question....

"ABC Co wants to issue new 10 year bonds for some much needed expansion projects. The company currently has a 9 percent coupon bond on the market that sells for $1165, makes semiannual payments, and matures in 10 years. What coupon rate should the company set on its new bonds if it wants them to sell at par?"

Any help would be appreciated. If you offer an answer, can you show your work or explain how you got the answer?

Thanks - this could be fun (okay, maybe not)

TJ

 

[Thunderballs]

You have to calculate the implied YTM. Selling the new bonds at the implied YTM (the yield that the market is demanding and is using to price the bonds) will allow them to sell at par.
Using a financial calculator N=20(10 yrs@2 pmts per yr);
PV=-1165; FV=1000; PMT=45(45 semi annual pmts)
Doing this i=3.3543
Double that to get a yearly yield and the rate is 6.7086%

I would also suggest that you get your prof a visit from an SP before he marks your final.

 

[TJ in the 'Peg]

Firm Figures !!!

Thanks Guys. I think Thunderballs is on the right path. My thinking was going in that direction, but I couldn't pull it together.

I will ponder this, and work it through. Any other ideas appreciated!

TJ

 

[TJ in the 'Peg]

and the correct answer is....

from point of view anyway - THUNDERBALLS
below is my proposed proof to his answer.


Test:

PV of the coupon = 1000/1.0670 to power of 10 = $522.82
PV of Annuity = 67(1-1/1.067 to power of 10)/.067 = $477.18
total = $1000.00

In order to sell at Par, the PV of the Coupon and Annuity must equal $1000.

Thanks TB, much appreciated.

TJ

 

[Thunderballs]

No problem. Glad I could help.

 

[TJ in the 'Peg]

Daisy

Hi there. Nope, I passed the CSC (with honours he says, while straining his arm from patting himself on the back) all the way back in 96.

TJ

 

[TJ in the 'Peg]

Thanks TBill, but I will pass. I have been in financial services for quite a while, first with Investors, then with Assante. Finished up my CFP in '94.

Right now I am taking more of a general business admin program, and working on the corporate finance module. I am using an older HP 10 B, but it gets the job done!

TJ

 

[danibbler]

About CFA...

Surprisingly, it stands for "Chartered Financial Analyst" and I'm enrolled in Level 1.

 

[TJ in the 'Peg]

Good luck, the CFA is a fairly tough course.

TJ

 

[Fred Zed]

best way to get your foot in door of investment biz is to pay 500 US for "Certified Financial Analyst" run by www.aimr.com. you dont have to complete it, just put on your resume "enrolled in CFA"

If think tbill is right. Particularly if you pass level I and have on you resume "enrolled in CFA Level II " that's enough to impress many employers. Most employers never bother to check as long as you sound like you know what you are talking about.

 

[Thunderballs]

Yes CFA does stand for Chartered Financial Analyst.
You get 7 years to complete the program before you have to re-register. If you do not complete the program in 7 years, simply shoot yourself (or become a broker).
Although I agree that the HP17BII calculator is the best finacial calculator out there, AIMR does not allow it for the exams. It only allows the Texas Instruments BAII plus and the HP10C (which is a hard to use antique piece of crap). Get the TI if you are doing the CFA course.
I would not recommend starting the course unless you intend to finish it which in itself takes a large committment on your part. I would say that having level 1 or even 2 under your belt with no intention of completing the course only shows the firm that you don't finish what you start. I have one such individual on staff and believe me, his potential advancement is severely limited by his refusal to take the course to completion. This line of thinking may get you in the door but certainly won't keep you there when the axe falls as it always does in a bear market.
The best way to get hired is to have your resume hand delivered to the guy doing the hiring by a smokin' SP who closes his office door and gives him FS.
I bet you think I'm joking.

 

[TJ in the 'Peg]

It's great to be a hiring manager...

TJ

 

[Thunderballs]

Tbill: I always thought the expression was useless as tits on a bull? How can you have tits on a bowl?

 

[Hepcat]

Thunderballs is right. The problem is that you may not always have your financial calculator handy - say for example when some brokerage house exec type you meet in the washroom at the House of Lancaster offers you $50000 face of 9% 10-year ABC bonds at a price of $800 per $1000 face giving you a yield to maturity of 12%. This is a way to check his figures on the back of a piece of toilet paper:

Per $1000 Face Value

Annual Coupon = $90
Avg. Annual Appreciation to Maturity = ($1000-$800)/10 = $20
Avg. price of the bond between now and maturity = ($800+$1000)/2 =$900

Yield to Maturity = ($90+$20)/$900 = 0.12222222

So the bond actually yields 12.222222 to maturity accurate to 0.05 of one percent (five basis points)! If you like the credit, snap it up! You just put one over on some dweeb who barely passed his C.F.A. and remembers sweet dickall about it (much like his jerk of a "boss")!