## 1. Corporates

Today, you bought an IBM 10 year non-callable bond that pays a 7% coupon. Interest payments are semiannual. You bought it a 8.5% yield. How much did you pay? Interest is paid on March 15 and September 15. Use an Actual/365 day count convention.

Later the same day, IBM misses earnings. The yield on your bond rises to 9%. What’s it worth now?

Hint: use XIRR.

## 2. Sovereigns

In the wake of Argentina’s most recent default, you buy their sovereign bonds that were selling for 12 cents on the dollar. Assuming these were 8% coupons, 20 year, US dollar denominated bonds, what yield does that imply if the bonds were to be redeemed at full value?

The bondholders as a group agree to take a 30% haircut. What yield does that imply?

(You may want to peruse this page on Wikipedia).

Hint: use XIRR.

## 3. Municipals

Goldman is selling Albany, New York’s 10 year general obligation bonds at par, at a of 2.25% yield to an investor with a 35% tax rate. What is the taxable equivalent yield? The issuer pays interest quarterly.

Hint: this one has nothing to do with XIRR.

## 4. Other

- Show the US yield curve. Do the same for three to five other countries. Turn in a single page, showing both data and a graph.
- For one country, show the yield curve from today, a month ago, three months ago, and a year ago. If you cannot find this data, choose another country. Turn in a single page, showing both data and a graph.
- In the US, prepare or find on the internet a table summarizing credit spreads. For the various credit ratings (AAA, AA, A, etc,) show the max and min credit spreads.

Does a haircut affect both the face value of a bond and therefore the interest it pays annually?

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In Slide 124 from class today, did you calculate interest by multiplying the coupon rate * the number of years to maturity? (3.8%*5years=19)

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Interest would be $1,000 times 3.8%, which is $38 per year. Since the payments are semiannual, that would equate to $19 per coupon.

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A haircut would be on the outstanding balance… Instead of owing x, you only have to repay 70% of x.

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If XIRR gives us a rate, what does this number tell us in terms of questions 1 and 2? Does this tell us the worth? Or is it an approximation for the yield to double check our cashflow value?

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The XIRR gives you a yield. In bond-speak, it would be a “yield to maturity”, if you’re considering the cashflows over the whole remaining maturity of the bond. You could also use it to calculate a “yield to call” if you’re assuming that the bond gets called away at some point in the future.

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For 1 and 2, can I assume that I buy bond in between 1st and 2nd payment periods? Because if I were to buy it before the 1st payment period, my YTM would be just my coupon?

What if our YTM is higher than out coupon –> is it a good signal?

Thanks!

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For 1, it says you bought it today.

For 2, why don’t you make the same assumption.

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