Bond Case Analysis Essay

Summary of FactsGilda Sears who is enrolled in an Investments class has picked a project on bail value theorems. The two important theorems that she decided to illust enume consider dealt with coupon rate and term-to- maturity date and how these factors influence the price. Thus she included 2 affixations with the alike rate and term with a contrastive coupon rate, as sanitary as two flummoxs with the akin rating and coupon rate with antithetical terms. She idea that if the connect markets were efficient, confiscates with similar characteristics would be priced so that in that location would be little conflict in the YTM. Besides S&P, she in any font looked at Moodys for additional information.There was an add in the amuse rates over 1984-1986 and hence discovered the actual YTM at different exhibit in time. Three periods were selected November 1, 1984, 1985, and 1986. The theorem states that YTM and price, as advantageously as coupon rate and price, should re nt an inverse relationship, while constipate time and price should have a cipher relationship. ** enliven refer to Annexure 1 for a summary on the Factual total in the case.ProblemsThe following are the problems of the caseQ1 exploitation the prices given, calculate the role price changes for the ternion periods for the capital of Massachusetts Edison and American instigant affixations and let off the unlikeness between the changes. Q2 Using the prices given, calculate the percentage price changes for the three periods for the AT&T and Bati more(prenominal) than hired gun bonds and explain the difference between the changes. Q3 Also, assuming there is a significant decline in engross rates, which of the four bonds would provide the largest voltage capital gain?Analysis and beginning** Please Refer to Annexure 2 for dissolving agent to I and III. Boston Edison and American Brand* The two bonds have the same rating and maturity dates, but different coupon rates. * A merican Brand has a higher coupon rate (5.87%) than Boston Edison (4.25%) * The percentage change in the bond prices is inversely related to the YTM and the Coupon Rate. * The difference in the price increase was more significant in the second and the terce period. * While the two bonds had comparable percentage price increase in the depression period (1985 to 1986), the difference became much more significant in the subsequent periods, where the bond with a lower coupon rate was much higher. * Hence, this is in sync with the coalition Price Theorem.II. AT&T and Baltimore mess up and Electric* The two bonds have the same rating and coupon rates, but different maturity dates. * AT&T has a lasting term (2/15/01) than Baltimore Gas and Electric (12/15/98) * The percent increase in price was much more significant in the first period, where the bond with the longer YTM had almost doubled the bond with the shorter YTM. * The percent decline in affair rate was also slightly great fo r the bond with a longer maturity date, as longer maturity makes bond price more sensitive to interest rates. cardinal. Largest potential capital gain** Please Refer to Annexure 3 for Solution to III* I calculated the duration of the bond to make a selection of the bond with the potential capital gain in the advent of a decline in the interestrates. * Though shorter duration minimizes the essay of actively trading in bonds, bonds with longer durations are less susceptible to fluctuation. * Hence, among the 4 bonds, AT&T is the one with the maximal duration and hence will have in mind a larger potential gain.