Finance Assignment: Bond Pricing, Yield, and Duration Analysis

This finance assignment solution focuses on bond valuation, yield to maturity (YTM), and bond duration. The assignment calculates the market price of a bond given its YTM, demonstrating an inverse relationship between YTM and market value. The analysis includes a graph illustrating this relationship. Furthermore, the solution calculates the duration of the bond, representing the percentage change in price for a unit change in yield, and emphasizes the importance of convexity for understanding the direction of price movement. The assignment references key financial texts and journals, including 'Investments' by Bodie, Kane, and Marcus, and articles by Kuehn and Schmid, and Hsu et al. The document provides detailed calculations and explanations of the concepts, offering a comprehensive understanding of bond analysis.

Running head: FINANCE
Finance
Name of the Student:
Name of the University:
Author’s Note:

1FINANCE
Table of Contents
Answer to Question A2:..................................................................................................................2
Answer to Question A3:..................................................................................................................2
Answer to Question A3:..................................................................................................................3
Reference & Bibliography:..............................................................................................................4

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Answer to Question A2:
If the yield to maturity of the stated bond is 1.858% per annum annually compounding on
11/7/2017, then the market price of the bond on 11/7/2017 would be $1,113.69. The detailed
calculations are shown in the excel sheet.
Answer to Question A3:
The graph, representing the relation between bond price and yield-to-maturity, is shown
below:
1.0
% 1.1
% 1.2
% 1.3
% 1.4
% 1.5
% 1.6
% 1.7
% 1.8
% 1.9
% 2.0
% 2.1
% 2.2
% 2.3
% 2.4
% 2.5
% 2.6
% 2.7
% 2.8
% 2.9
% 3.0
%
950
1000
1050
1100
1150
1200
Market Value vs. YTM
Market Value
YTM
Market Value

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From the graph, it can be stated that the market value of the bond would fall with the
increase in the yield-t-maturity rate. It means that for this particular bond the YTM and the
market value are related inversely with each other. In general, fair value or the market value of
the bond is the present value of the stream of cash flows, whereas, the yield-to-maturity is used
as discount rate for determining the present values of the cash flow. It has been observed that for
the bonds, which are sold at par, the coupon rate is used to be equal to the YTM. In this case, the
bonds are redeemed at par, however, YTM of the bond is lower than the coupon rate. Hence,
with increase in the YTM the market value has decreased gradually. The fall in the market value
would continue until the YTM would become equal to the coupon rate. After that, with the
increase in YTM, the market value would increase also (KUEHN and Schmid 2014).
Answer to Question A3:
Duration of the bond is the weighted average periods until the fixed cash flows, generated
from the bond, are received. It also represents the percentage of price for a unit of change of
yield. As per the calculation, shown in the excel sheet, the duration of the stated bond is 6.94.

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It means that the market value of the bond would change by 6.94% if the yield rate changes by
1% point (Jordan 2014). However, it should be noted that duration does not indicate whether the
value would increase or decrease for the change in yield rate. Hence, along with duration, it is
also necessary to determine the convexity of the bond, which can explain the direction of the
bond price movement (Hsu et al. 2015).

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Reference & Bibliography:
Bodie, Z., Kane, A. and Marcus, A.J., 2014. Investments, 10e. McGraw-Hill Education
Brooks, R., 2015. Financial management: core concepts. Pearson
Eom, Y.H., Helwege, J. and Huang, J.Z., 2004. Structural models of corporate bond pricing: An
empirical analysis. The Review of Financial Studies, 17(2), pp.499-544.
Hsu, P.H., Lee, H.H., Liu, A.Z. and Zhang, Z., 2015. Corporate innovation, default risk, and
bond pricing. Journal of Corporate Finance, 35, pp.329-344
Jordan, B., 2014. Fundamentals of investments. McGraw-Hill Higher Education
KUEHN, L.A. and Schmid, L., 2014. Investment‐Based Corporate Bond Pricing. The Journal of
Finance, 69(6), pp.2741-2776