# FINRA’s Bond Center

## Module 2 – Case

### PRESENT VALUE AND BOND VALUATION

#### Assignment Overview

This assignment is in a different direction than your Module 1 Case in that it is mostly computational in nature.  Before starting this assignment, work through some of the examples in the background readings to make sure you understand all of the steps involved in future value and present value, including use of present value formulas to compute the value of a bond.  Question 4 requires the use of Excel, although you can get partial credit if you solve it instead using a calculator and show all of your work.  Go through the videos and sample Excel spreadsheet in the background readings before starting on Question 4.  Note that while Excel is only required for Question 4, you may also wish to use it for Questions 1-3.

#### Case Assignment

Present your answers to the following problems in a Word document, and include an Excel spreadsheet with your computations for Question 4 or any other questions that you use Excel for. Note that you will get partial credit if you show your work even if the answers are incorrect, and Excel is only required for Question 4 (it is greatly recommended for Questions 1-3 but not required). Also, if you are unable to get up and running with Excel then you can get partial credit by instead using a calculator as long as you carefully show all of your steps in a Word document.

1. Compute the future value for the following:
1. \$2,000 after being invested for two years in a savings account with 3% interest rate
2. \$5,000 after being invested for ten years in a savings account with a 1% interest rate
3. \$3,500 after being invested for nine years in a savings account with an 11% interest rate
2. Compute the present value for the following:
1. \$3,000 to be paid in one year with a 9% discount rate
2. \$3,000 to be paid in three years with a 9% discount rate
3. \$4,000 to be paid in ten years with a 5% discount rate
3. Compute the present value for the following:
1. An investment that will pay you \$1,000 in one year, another \$1,000 in two years, and a third payment of \$1,000 in three years (e.g., three payments of \$1,000 to be paid once a year for three years). The discount rate is 4%.
2. The same three \$1,000 payments as in part a) above, but with a 6% discount rate
3. An investment that will pay you \$2,000 in one year, another \$1,500 in two years, and a third payment of \$3,000 in three years. The discount rate is 4%.
4. Compute the value of the following bonds assuming a 3% discount rate (required rate of return):
1. A zero-coupon bond that pays \$1,000 in five years
2. A bond that pays \$1,000 in five years, with five annual coupon payments of \$20 each
3. What is the coupon rate if coupon payments are \$20 per year? At what discount rate would the value of the bond be “at par” (e.g., be worth \$1,000?). Explain your reasoning.
5. This part of the assignment is purely conceptual with no computations required. Explain the following with references to the required readings:
1. What is likely to happen to interest rates if the rate of inflation suddenly increases?
2. Suppose there are two bonds each with coupon payments of \$50. The first bond pays \$1,000 in five years, and the other one pays \$1,000 in ten years. If interest rates increased, would the value of the bonds increase or decrease? Which of the two bonds would have their value change more after the increase in interest rates? Explain your reasoning.

#### Assignment Expectations

• Stay focused on the precise assignment questions. Do not go off on tangents or devote a lot of space to summarizing general background materials.
• For computational problems, make sure to show your work and explain your steps.
• For short answer/short essay questions, make sure to reference your sources of information with both a bibliography and in-text citations. See the Student Guide to Writing a High-Quality Academic Paper, including pages 11-14 on in-text citations. Another resource is the “Writing Style Guide,” which is found under “My Resources” in the TLC Portal.

## Module 2 – SLP

### PRESENT VALUE AND BOND VALUATION

For your Module 2 SLP, continue your research on the four companies that you selected for your Module 1 SLP. Whereas you focused on the stocks of each company in Module 1, we will now be looking at the bonds of these four companies. Do some research on credit ratings of the bonds of these companies as well as the yields and bond prices. Specifically, write a two-page paper presenting the following information:

1. What is the bond ratings of each of these companies? Do a search online and see what credit rating Standard & Poor’s or Moody’s has given these companies. What reasons do you see for the differences in credit ratings between these companies?
2. Go to FINRA’s Bond Center and click on the “search” button. Then enter the ticker symbol of the different companies to see their bond yields and maturity dates. You can also do a Google search on the bond yields for your four companies. Note that most companies have multiple bonds that are currently being traded. Which bond has the longest time before maturity? The least time to maturity? What are the bond prices and bond yields of these bonds? Discuss which of your four companies has the greatest bond yields and which ones have the lowest bond yields. Do these correspond well to the credit ratings that you found for these companies?
3. Pick out one bond from one of your four companies. Calculate the present value of this bond using the following steps:
1. Look at the maturity date of the bond. If the maturity date is in five years, then assume you will get five more coupon payments before the bond matures.
2. Look at the coupon rate for the bond and calculate what the coupon payments will be. For example, if the coupon rate is 4.3% then the payments should be \$43.
3. Take the interest rate you get at your local bank and use this as the discount rate. Calculate the present value of the final bond payment of \$1,000 that you will get at the maturity date, and calculate the present value of each of the remaining coupon payments. Compare the present value you get with the current bond price. Divide the present value by ten and see if this is similar to the price of this bond that you see on Morningstar. Note that bond prices are quoted so a bond price of \$1,000 would be denoted as “100” or a bond price of \$1,100 would be “110”. Comparing the price to the present value you computed based on the interest rate you get from your local bank, is the bond a good value? For example, if you get a present value of \$1,200 and the bond price is 110, then the bond is a good value given your bank’s interest rate.

#### SLP Assignment Expectations

• Answer the assignment questions directly.
• Stay focused on the precise assignment questions. Do not go off on tangents or devote a lot of space to summarizing general background materials.
• For computational problems, make sure to show your work and explain your steps.
• For short answer/short essay questions, make sure to reference your sources of information with both a bibliography and in-text citations. See the Student Guide to Writing a High-Quality Academic Paper, including pages 11-14 on in-text citations. Another resource is the “Writing Style Guide,” which is found under “My Resources” in the TLC Portal.