BOND VALUATION Clifford Clark is a recent retiree who is interested in investing some of his savings in corporate bonds. His financial planner has suggested the following bonds.
- BOND A has a 7% annual coupon, matures in 12 years, and has a $1,000 face value
- BOND B has a 9% annual coupon, matures in 12 years, and has a $1,000 face value
- BOND C has a 11% annual coupon, matures in 12 years, and has a $1,000 face value
EACH BOND HAS A YIELD TO MATURITY OF 9%
Prepare a spreadsheet using Excel in which you compute the items listed in parts a, b and d listed below. Be sure to compute the Yield-to-Maturity (YTM) and Yield-to-Call (YTC) for each years of 5,6,7,8 and 9.
A. Before calculating the prices for bonds, indicate whether each bond is trading at a premium, at a discount, or par.
B. Calculate the price of each of the three bonds.
D. If the yield to maturity for each bond remains at 9%, what will be the price of each bond 1 year from now? What is the expected capital gains yield from each bond? What is the expected total return for each bond?
1. Provide a detailed explanation of the conclusion you reached considering whether or not to call the bond before maturity.
2. If your recommendation is to call the bond early, explain when to call the bond and your rationale.
3. List some advantages and disadvantages of using a long-term loan instead of a bond.