Corporate Managerial Finance Assignment | Get Paper Help

In your paper, provide the following: The current U.S. Treasury yield curve. At the S. Department of the Treasury (Links to an external site.) website, click on the “search” bar in the righthand corner, search for the term “yield curve,” and select “Daily Treasury Yield Curve Rates.” Copy the most recent rates for the 1-year through 30-year bonds into Excel and then plot the current treasury yield curve. Find the current yields for bonds issued by Microsoft Corporation. Go to the Finra webpage Bonds (Links to an external site.). Using the search tab, choose “Corporate” for the bond type and enter “Microsoft” for the issuer name. Sort the bonds by maturity and note the yields for bonds maturing within one to 30 years. Add a plot of these yields to your graph of the treasury yield curve and label it using Microsoft’s current bond rating. You can use Excel’s trendline feature to plot a smooth curve through these points. Hint: Try different polynomial trendlines to find one that seems to provide a reasonably smooth approximation of the data. Note: These bonds may differ somewhat in seniority or have features such as call provisions that cause their yields to vary. Also, the quotes provided are based on the most recent trades, but the timing of those trades may differ across bonds. For these reasons bonds with similar maturity and rating may have different yields. Fitting a trendline through the points provides a rough estimate of the average yields we might expect for each maturity. Repeat the analysis in the second bullet for CVS Health. Identify CVS Health’s bond rating. Compare CVS Health’s bond yield curve to that of Microsoft. Repeat the analysis again for Boeing Corporation (search for “Boeing Co.”). Identify Boeing Corporation’s bond rating. Compare Boeing Corporation’s yield curve to those of CVS Health and Microsoft. Using the yield curves you have found, estimate the value of an annuity that pays $1000 every five years over the next 25 years (e.g., five total payments) paid by either the U.S. Department of the Treasury, Microsoft, CVS, or Boeing. Calculate the implied yield to maturity for each security. Note: While the yields you have plotted are for coupon bonds, because coupon rates are relatively low, you decide to treat them as zero-coupon yields for this estimation, as you feel the estimation error from such an approximation is small relative to the other noise in the data. The Chapter 6 Data Case: Corporate Yield Curves paper Must be two to three double-spaced pages in length (not including title and references pages) and formatted according to APA Style (Links to an external site.) as outlined in the Writing Center’s APA Formatting for Microsoft Word (Links to an external site.) resource. Must include a separate title page with the following: Title of paper Student’s name Course name and number Instructor’s name Date submitted Must use at least two scholarly and/or industry sources. The Scholarly, Peer-Reviewed, and Other Credible Sources (Links to an external site.) table offers additional guidance on appropriate source types. If you have questions about whether a specific source is appropriate for this assignment, please contact your instructor. Your instructor has the final say about the appropriateness of a specific source for a particular assignment. Must document any information used from sources in APA Style as outlined in the Writing Center’s APA: Citing Within Your Paper (Links to an external site.) guide. Must include a separate references page that is formatted according to APA Style as outlined in the Writing Center. See the APA: Formatting Your References List (Links to an external site.) resource in the Writing Center for specifications

Figure 6.1 illustrates the effect of time on bond prices, assuming the yield to maturity re-mains constant. Between coupon payments, the prices of all bonds rise at a rate equal to the yield to maturity as the remaining cash flows of the bond become closer. But as each coupon is paid, the price of a bond drops by the amount of the coupon. When the bond is trading at a premium, the price drop when a coupon is paid will be larger than the price increase between coupons, so the bond’s premium will tend to decline as time passes. If the bond is trading at a discount, the price increase between coupons will exceed the drop when a coupon is paid, so the bond’s price will rise and its discount will decline as time passes. Ultimately, the prices of all bonds approach the bonds’ face value when the bonds mature and their last coupon is paid. For each of the bonds illustrated in Figure 6.1, if the yield to maturity remains at 5%, investors will earn a 5% return on their investment. For the zero-coupon bond, this return is earned solely due to the price appreciation of the bond. For the 10% coupon bond, this return comes from the combination of coupon payments and price depreciation over time. Interest Rate Changes and Bond Prices As interest rates in the economy fluctuate, the yields that investors demand to invest in bonds will also change. Let’s evaluate the effect of fluctuations in a bond’s yield to maturity on its price. Consider again a 30-year, zero-coupon bond with a yield to maturity of 5%. For a face value of $100, the bond will initially trade for P (5% yield to maturity) = 100 /1.0530 = $23.14 But suppose interest rates suddenly rise so that investors now demand a 6% yield to maturity before they will invest in this bond. This change in yield implies that the bond price will fall to P (6% yield to maturity) = FIGURE 6.1 The Effect of Time on Bond Prices The graph illustrates the effects of the passage of time on bond prices when the yield remains constant. The price of a zero-coupon bond rises smoothly. The price of a coupon bond also rises between coupon payments, but tumbles on the coupon date, reflecting the amount of the coupon pay-ment. For each coupon bond, the gray line shows the trend of the bond price just after each coupon is paid. 200 180 160 140 100 120 80 60 40 20 0 05 10 15 Year 20 25 30 10% Coupon Rate 100 /1.0630 = $17.41

Problem Consider a 15-year zero-coupon bond and a 30-year coupon bond with 10% annual coupons. By what percentage will the price of each bond change if its yield to maturity increases from 5% to 6%?

Solution First, we compute the price of each bond for each yield to maturity: Yield to Maturity 15-Year, Zero-Coupon Bond 5% 100/1.0515 = $48.10  6% 100 /1.0615 = $41.73 10 * 10 * 0.06 30-Year, 10% Annual Coupon Bond 1.0530 b + 1 0.05 1 a1 – a1 – 1 1.0630 b + 1 100 1.0530 = $176.86 100 1.0630 = $155.06 The price of the 15-year zero-coupon bond changes by (41.73 – 48.10)>48.10 = -13.2% if its yield to maturity increases from 5% to 6%. For the 30-year bond with 10% annual coupons, the price change is (155.06 – 176.86)>176.86 = -12.3%. Even though the 30-year bond has a longer maturity, because of its high coupon rate, its sensitivity to a change in yield is less than that of the 15-year zero coupon bond.

Replicating a Coupon Bond Because it is possible to replicate the cash flows of a coupon bond using zero-coupon bonds, we can use the Law of One Price to compute the price of a coupon bond from the prices of zero-coupon bonds. For example, we can replicate a three-year, $1000 bond that pays 10% annual coupons using three zero-coupon bonds as follows: 01 2 Coupon bond: 1-year zero: 2-year zero: 3-year zero: Zero-coupon bond portfolio: $100 $100 $100 $100 $100 $100 $1100 $1100 We match each coupon payment to a zero-coupon bond with a face value equal to the coupon payment and a term equal to the time remaining to the coupon date. Similarly, we match the final bond payment (final coupon plus return of face value) in three years to a three-year, zero-coupon bond with a corresponding face value of $1100. Because the cou-pon bond cash flows are identical to the cash flows of the portfolio of zero-coupon bonds, the Law of One Price states that the price of the portfolio of zero-coupon bonds must be the same as the price of the coupon bond

Yields and Prices (per $100 Face Value) for Zero-Coupon Bonds 1 year 3.50% $96.62 2 years 4.00% $92.45 3 years 4.50% $87.63 4 years 4.75% $83.06 To illustrate, assume that current zero-coupon bond yields and prices are as shown in Table 6.2 (they are the same as in Example 6.1). We can calculate the cost of the zero-coupon bond portfolio that replicates the three-year coupon bond as follows: Zero-Coupon Bond 1 year 2 years 3 years Face Value Required 100 100 1100 Total Cost: Cost 96.62 92.45 11 * 87.63 = 963.93 $1153.00 By the Law of One Price, the three-year coupon bond must trade for a price of $1153. If the price of the coupon bond were higher, you could earn an arbitrage profit by selling the coupon bond and buying the zero-coupon bond portfolio. If the price of the coupon bond were lower, you could earn an arbitrage profit by buying the coupon bond and short selling the zero-coupon bonds. Valuing a Coupon Bond Using Zero