Bond Case Analysis Essay

Summary of FactsGilda Sears who is enrolled in an Investments class has picked a see on bond set theorems. The 2 main theorems that she decided to expand dealt with voucher rate and term-to-maturity and how these factors influence the price. Thus she included 2 bonds with the equal(p) rating and term with a distinct coupon rate, as rise up as two bonds with the same rating and coupon rate with different terms. She thought that if the bond markets were efficient, bonds with similar characteristics would be priced so that there would be little difference in the YTM. Besides S& antiophthalmic factorP, she excessively looked at Moodys for additional information.There was an increase in the interest rates over 1984-1986 and hence observed the actual YTM at different point in time. Three periods were selected November 1, 1984, 1985, and 1986. The theorem states that YTM and price, as well as coupon rate and price, should have an inverse relationship, while bond while and price s hould have a direct relationship. ** Please refer to Annexure 1 for a summary on the Factual Numbers in the case.ProblemsThe quest are the problems of the caseQ1 use the prices given, calculate the percentage price changes for the terce periods for the capital of Massachusetts Edison and American Brand bonds and explain the difference between the changes. Q2 Using the prices given, calculate the percentage price changes for the three periods for the AT&T and Batito a greater extent Gas bonds and explain the difference between the changes. Q3 Also, assuming there is a significant decline in interest rates, which of the four bonds would provide the largest potential difference capital gain?Analysis and ancestor** Please Refer to Annexure 2 for Solution to I and III. Boston Edison and American Brand* The two bonds have the same rating and maturity dates, but different coupon rates. * American Brand has a higher coupon rate (5.87%) than Boston Edison (4.25%) * The percentage cha nge in the bond prices is inversely related to the YTM and the coupon Rate. * The difference in the price increase was more than significant in the second and the third period. * While the two bonds had comparable percentage price increase in the first 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 Bond Price Theorem.II. AT&T and Baltimore Gas and electric car* The two bonds have the same rating and coupon rates, but different maturity dates. * AT&T has a longer 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 treble the bond with the shorter YTM. * The percent decline in interest rate was similarly slightly greater for the bond with a longer maturity date, as longer maturity makes bond price more sensiti ve to interest rates.III. Largest potential capital gain** Please Refer to Annexure 3 for Solution to III* I calculated the succession of the bond to make a selection of the bond with the potential capital gain in the orgasm of a decline in the interest rates. * Though shorter duration minimizes the stake of actively trading in bonds, bonds with longer durations are less supersensitized to fluctuation. * Hence, among the 4 bonds, AT&T is the one with the maximum duration and hence will entail a larger potential gain.