10. Assume it is early 2003 and the following bond quotations appeared in the wall street journal
Conoco Phillips COP 5.900 Oct 15, 2032 95.975 6.200 90 30 88,510
Amerada Hess AHC 7.125 Mar 15, 2033 100.145 7.113 179 30 55,000
a. How much in annual interest payment would an investor in each of these bonds receive?
b. How much would you have to pay to buy one COP bond at the price shown.
c. Why do you think the yield to maturity on the AHC bond is higher than the yield to maturity on the COP bond
In the case of Conoco Phillips, 5.90 is the "coupon" interest rate, expressed as a percent of face value. Oct 15, 2032 is the maturity date when principle (face value) is to be repaid. 95.957 is the actual price per $100 face value, and 6.2000 is the equivalent Yield to Maturity. I don't know what the other numbers represent. One might represent a most recent sale.
To calculate the annual interest payment for each bond, we need to multiply the bond's coupon rate by its face value.
a. For the Conoco Phillips (COP) bond:
- Coupon Rate: 5.900%
- Face Value: $1000 (usually the default for corporate bonds unless otherwise mentioned)
Annual Interest Payment = Coupon Rate * Face Value
= 5.900% * $1000
= $59.00
Therefore, an investor in the COP bond would receive an annual interest payment of $59.00.
b. To determine the cost of buying one COP bond at the given price, we need to multiply the price by the face value.
Given:
- Price: $95.975
- Face Value: $1000
Cost of buying one COP bond = Price * Face Value
= $95.975 * $1000
= $95,975
Thus, one COP bond could be purchased for $95,975.
c. The yield to maturity (YTM) reflects the total annualized return an investor can expect to receive if they hold the bond until maturity. The YTM takes into account the bond's coupon rate, current price, maturity date, and prevailing market interest rates.
In this case, the yield to maturity on the AHC bond is higher than that of the COP bond. This suggests that investors require a higher return on investment for the AHC bond compared to the COP bond.
Possible reasons for the higher YTM on the AHC bond:
1. Higher Risk: The market perceives the AHC bond as carrying a higher level of risk, either due to the financial health of Amerada Hess or the overall industry it operates in.
2. Longer Maturity: The AHC bond has a later maturity date (Mar 15, 2033) compared to the COP bond (Oct 15, 2032). The longer the bond's life, the greater the uncertainty and potential risk factors impacting its yield.
3. Supply and Demand: The market demand for the AHC bond may be lower relative to its supply, pushing its yield higher.
4. Different Coupon Rates: Although not directly mentioned in the question, it's possible that the AHC bond's higher yield is a result of offering a higher coupon rate than the COP bond. Investors would demand a higher yield to maturity if they expect higher coupon payments.
Please note that these are possible explanations, and more detailed analysis may be required to determine the exact reasons for the difference in yield between the AHC and COP bonds.