Corporate Finance: Bond Value, Yield to Maturity, Bond Laddering, Diversification, Riding the Yield Curve, Treynor's Measure

Running Head: Corporate Finance
Bond Value

Corporate Finance
Question 1
Part a
Yield to maturity is the rate that is used to discount the future cash flows associated with the
bond. Typically it is the return earned by the bondholder for purchasing and holding the
bonds till their maturity. This rate equates the present value of the cash flows related to bond
with their current market price. YTM is also referred as internal rate of return or the market
interest rate (Stack Exchange, 2018).
Part b
Formula
$1,276.76 = $80 ×Annuity factor(r, 30) + $1,000 ×PV
factor(r, 30)
FV 1000
Price 1276.76
Maturity 30
Coupon 8%
PMT $80.00
Bond Equivalent
Yield 6% (rounded off)
Part c
The critical assumptions embedded in the 30-Year Bond yield to maturity figure are as
follows:
 The holder of the bond will keep the bond till the maturity of such bonds.

Corporate Finance
 The coupon (interest on bonds) must be invested at the same rate as that of YTM
(Stack Exchange, 2018).
Question 2
Part a
Year
s Cash Flows ($) DCF PV ($)
1 60 0.917 55.046
2 60 0.982 58.934
2 1000 0.982 982.240
Price of bond 1096.220
Part b
Bond Price=
( (Coupon/YTM)* ( 1-(1/(1+YTM/2)2M) ) +
(FV/(1+YTM/2)^2M)
Part c
Yield at year 2 is lesser than yield to maturity at year 2 because the yield to maturity includes
the year 1 interest payment made on the bond. However, year 2 yield only covers only
interest and principle payment.
Question 3
Part a

Corporate Finance
Bond Laddering is a strategy which involves maturity weighting under which funds of the
investors are divided among different bonds that have longer maturities. This strategy is used
to reduce or minimise the risk of interest rate fluctuation and re-investment risk
(Investinginbonds.com., 2018).
For example:
John has invested funds in equal amounts to different bonds which will mature at the regular
intervals.
Bond A Bond B Bond C Bond D Bond E
Maturity: 2
Years
Maturity: 4 Year Maturity: 6 Year Maturity: 8 Year Maturity: 10
Year
Amount=
$20000
Amount=
$20000
Amount=
$20000
Amount=
$20000
Amount=
$20000
Interest Rate=
1.55%
Interest Rate=
2.05%
Interest Rate=
2.80%
Interest Rate=
3.22%
Interest Rate=
3.30%
The average maturity of the portfolio consisting of above bonds is 15 years. Now, when the
bond A will mature after 2 years, John will have two options:
Either to reinvest his principle in a fresh 10 year bond or to take the money out and invest
somewhere else. The other bonds will be 2 years closer to their respective maturity now.
Bond laddering strategy is a buy-hold strategy that can be used as support for the potential
impact of rising interest rates (Carlson, 2018).
Part b: