Abacus Inc. has asked you price a 5 year bullet bond
Abacus Inc. has asked you price a 5 year bullet bond issue for them, with Price, Yield to Maturity and Modified Duration. There are no comparable existing issues in the secondary market either by Abacus or a competitor and so you will need to price the issue from scratch.
You have the following set of US Treasury bond data and consultations with your Bank Equity Analyst and Debt Analyst suggest that a Z-spread for Abacus of 200 bps over Treasuries and a coupon rate of 6.5% should be appropriate to attract investors.
US Treasury Notes Coupon Yield to Maturity Zero coupon rate
1 Year 3.25% 3% 3%
2 Year 3.80% 3.25%
3 Year 4.5% 3.5%
4 Year 5% 4%
5 Year 6% 4.5% You can assume that coupon payments are annual and that you are pricing on a coupon day (no accrued interest) and you may ignore basis conventions.
You should make your process and methodology clear with explanations at each stage.
Assignment hint: You will need to use the T-Note data to bootstrap a zero coupon treasury curve and apply the Z-spread to price the Abacus bond. You might find it easier to use the PV and RATE functions in Excel rather than PRICE and YIELD (but both will work).
Step 1: Calculate the Price of Bonds (We will use the EXCEL FUNCTION PV)
Assume Face Value of bonds as $ 1000 (it does not matter whether we select $100, $1000, $10,000 or any number) Face Value $1,000.00 Year Coupon YTM Annual Coupon Payment Price
1 3.25% 3% $32.50 =3.25% x $1,000. $1,002.43 = -PV(3.%,1,32.5,1000)
2 3.80% 3.25% $38.00 =3.8% x $1,000. $1,010.49 = -PV(3.25%,2,38,1000)
3 4.50% 3.50% $45.00 =4.5% x $1,000. $1,028.02 = -PV(3.5%,3,45,1000)
4 5% 4% $50.00 =5.% x $1,000. $1,036.30 = -PV(4.%,4,50,1000)
5 6% 4.50% $60.00 =6.% x $1,000.
You have the following set of US Treasury bond data and consultations with your Bank Equity Analyst and Debt Analyst suggest that a Z-spread for Abacus of 200 bps over Treasuries and a coupon rate of 6.5% should be appropriate to attract investors.
US Treasury Notes Coupon Yield to Maturity Zero coupon rate
1 Year 3.25% 3% 3%
2 Year 3.80% 3.25%
3 Year 4.5% 3.5%
4 Year 5% 4%
5 Year 6% 4.5% You can assume that coupon payments are annual and that you are pricing on a coupon day (no accrued interest) and you may ignore basis conventions.
You should make your process and methodology clear with explanations at each stage.
Assignment hint: You will need to use the T-Note data to bootstrap a zero coupon treasury curve and apply the Z-spread to price the Abacus bond. You might find it easier to use the PV and RATE functions in Excel rather than PRICE and YIELD (but both will work).
Step 1: Calculate the Price of Bonds (We will use the EXCEL FUNCTION PV)
Assume Face Value of bonds as $ 1000 (it does not matter whether we select $100, $1000, $10,000 or any number) Face Value $1,000.00 Year Coupon YTM Annual Coupon Payment Price
1 3.25% 3% $32.50 =3.25% x $1,000. $1,002.43 = -PV(3.%,1,32.5,1000)
2 3.80% 3.25% $38.00 =3.8% x $1,000. $1,010.49 = -PV(3.25%,2,38,1000)
3 4.50% 3.50% $45.00 =4.5% x $1,000. $1,028.02 = -PV(3.5%,3,45,1000)
4 5% 4% $50.00 =5.% x $1,000. $1,036.30 = -PV(4.%,4,50,1000)
5 6% 4.50% $60.00 =6.% x $1,000.