Bond Analysis 3

Running Head: BOND ANALYSIS

Bond Analysis

Answer. 1

The below table indicates the bond yields for Treasury securities with the maturities of three months, six months, one year, three years, five years, 10 years, 30 years.

(Source: Dow Jones & Company, Inc, 2014)

On the basis of this table, creates a yield curve through placing yield-to-maturity on the vertical (y) axis and term-to-maturity on the horizontal (x) axis, which is shown in the below:

The above yield curve graphic indicators of the US bonds’ future value that helps the investors to visualize the changes in the interest rate on bonds represents to the maturity date. The general shape of the yield curve is upward meant the yield rate is increased when the maturity of yield increased.

The yield curve indicates that in the future interest rate movements similarly with the yield curve means the high maturity Treasury bond secured interest rate is higher than low rate maturity (Brigham & Houston, 2009). In addition, it can also be concluded that yield curve indicates uncertainties of the economy and investors were profitable if they would outsmart the dealers those trades constitute the curve.

Answer. 2

(a) In the case of yield-to-maturity (YTM) on the bond falls from 8.5% to 8%, then the present value of the treasury or the band raise means the market price increases. For example, if the future value (FV) of $1000 then calculation of present values is given below:

FV= $1000

I = 8.0% (the new YTM)

N = 10 (number of years)

PMT= $90

P/Y = 1

Then, the PV is $1067.10 that means the new price is $1067.10. It indicates that if the YTM falls from 8.5% to 8%, then the price rises (Choudhry, 2002).

(b) In the case of bond gets one year closer to its maturity than the present value ($1000) and future value ($1000) of bond is similar. So, if the bond gets one year closer to its maturity than the YTM and coupon rate are equal and the price of a bond is similar to the par value.

(c) In the case of the market interest rates go from 8% to 9%, then the price of the bond is declined. For example, calculation of present values is given below:

FV= $1000

I = 9.0% (the new YTM)

N = 10 (number of years)

PMT= $90

P/Y = 1

Then, the PV is $968.61 that means the new price of bond of $968.61 that shows that if the market interest rates go from 8% to 9% than the price of bond decreases and less than the par value of bond (Choudhry, 2002).

References

Brigham, E.F. & Houston, J.F. (2009). Fundamentals of Financial Management. USA: Cengage Learning.

Choudhry, M. (2002). Capital Market Instruments: Analysis and Valuation. UK: FT Press.

Dow Jones & Company, Inc. (2014). Barron's: Bonds, Rates & Credit Markets Overview. Retrieved from: http://online.barrons.com/mdc/public/page/9_3010.html?refresh=on

Yield (%) 3-Month 6-Month 1-Year 3-Year 5-Year 10-Year 30-Year 2.300000000000001E-2 5.6000000000000022E-2 9.1000000000000025E-2 0.67200000000000171 1.4969999999999974 2.6509999999999998 3.6040000000000001