Unit 7 Assessment — Bonds & Fixed Income Valuation

💵 Bond Pricing

📐 Yield Measures

⚖️ Price vs. Rate Relationships

📋 Bond Features & Types

Bond Pricing

Bond Price (V_B)V_B = Σ[INT÷(1+r_d)^t] + M÷(1+r_d)^N

Annual Coupon PaymentINT = Par Value × Coupon Rate

Semi-Annual Adjustmentr_d÷2 per period; N×2 periods

Current YieldAnnual Coupon ÷ Current Market Price

Yield Measures

Yield to Maturity (YTM)Discount rate where PV of cash flows = Price

YTM Approximation[INT + (M−V_B)÷N] ÷ [(M+V_B)÷2]

Yield to Call (YTC)Like YTM but uses call price & call date

After-Tax YieldYTM × (1 − Marginal Tax Rate)

Price vs. Rate Relationships

Coupon Rate > r_d (required)Bond sells at PREMIUM (price > par)

Coupon Rate < r_d (required)Bond sells at DISCOUNT (price < par)

Coupon Rate = r_d (required)Bond sells at PAR ($1,000)

Longer maturity → more price sensitivityDuration measures this interest rate risk

Bond Types

Treasury BondsU.S. govt · DRP = 0% · highly liquid

Municipal BondsTax-exempt interest · lower nominal yield

Corporate BondsDRP reflects credit rating · AAA→junk

I Bonds (Series I)Inflation-adjusted rate · ideal for savers

Zero-Coupon BondNo coupon; sold at deep discount to par

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out of 100 points

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Section 1

—/40

Multiple Choice

Section 2

—/20

True / False

Section 3

—/20

Short Answer

Section 4

—/20

Extended Response

⚠ Sections 3 & 4 are teacher-graded. Use the rubric selectors below to finalize the score.

Multiple Choice

Select the best answer · Includes bond pricing, YTM & current yield calculations

2 pts each · 40 pts

Click the best answer. Use the formula reference banner and bond rating strip above for calculation and concept questions. Each question is worth 2 points.

True or False

Click TRUE or FALSE for each statement

2 pts each · 20 pts

Select TRUE or FALSE for each statement. Each is worth 2 points.

Short Answer

Show all calculations + explain in 2–4 sentences · Teacher-graded

5 pts each · 20 pts

Answer in 2–4 complete sentences. Show every calculation step clearly. Rubric selectors appear after grading.

Extended Response — BBYM Community Bond Portfolio Analysis

Multi-bond scenario · Price, YTM & portfolio recommendation · Teacher-graded

20 pts

Read the scenario carefully. Write a well-organized analytical memo of at least 8 sentences. Show all calculations with labeled steps. Use and underline at least four unit vocabulary terms.

📋 Scenario — The Swanson Initiative: Evaluating a Fixed-Income Portfolio

The Swanson Initiative has accumulated $50,000 in its community trust fund and is evaluating three fixed-income securities to add to its conservative investment portfolio. As the student portfolio analyst, you must price each bond, analyze its risk, and write a recommendation memo to the trust committee.

Bond A — U.S. Treasury

Par: $1,000 · Coupon: 5% annual · Maturity: 10 yrs · Required return (r_d): 6%

Bond B — BBB Corporate

Par: $1,000 · Coupon: 7% annual · Maturity: 10 yrs · Required return (r_d): 7%

Bond C — Municipal Bond

Par: $1,000 · Coupon: 4.5% tax-exempt · Maturity: 10 yrs · r_d: 5% · Trust's tax rate: 25%

Rate Scenario

If market rates RISE 2% after purchase, which bond loses the most value? Explain using duration concepts.

35 Write your full analytical memo addressing all four parts: (a) Price Bond A (Treasury, 5% coupon, r_d = 6%, 10 years) — show the full PV calculation and state whether it trades at a premium, par, or discount; (b) Price Bond B (BBB Corporate, 7% coupon, r_d = 7%, 10 years) — show work and state the price and rating implications; (c) Calculate the taxable-equivalent yield of Bond C's 4.5% municipal rate for the trust's 25% tax bracket and compare it to Bond B's 7% yield — which offers better after-tax value?; (d) If market interest rates rise by 2% on all bonds after purchase, explain which bond (A, B, or C) loses the most value and why — reference duration and the inverse price-yield relationship. Conclude with a portfolio recommendation for the trust committee. Use at least four underlined vocabulary terms.

📋 Teacher Scoring Rubric

Criterion	Excellent (Full)	Proficient (Partial)	Developing (Minimal)	Score
Part (a) — Price Bond A V_B = PV of 10 × $50 annuity + PV of $1,000 at 6% ≈ $926.40 · Discount bond (coupon 5% < r_d 6%)	Correct price (~$926) with full PV formula shown; correctly identifies as discount bond with explanation	Correct formula setup; minor arithmetic error; discount/premium identified	Wrong formula or answer; no premium/discount identification	/6
Part (b) — Price Bond B Coupon rate = r_d = 7% → Bond B prices at PAR = $1,000 · BBB rating = investment grade floor	Correctly states price = $1,000 at par with explanation; discusses BBB rating and credit risk implications	Price correct but rating analysis thin	Incorrect price or no rating discussion	/4
Part (c) — Muni Tax-Equiv Yield TEY = 4.5% ÷ (1 − 0.25) = 6.0% · Bond B offers 7% > 6.0% TEY → Bond B better after-tax	TEY = 6.0% correctly calculated; correctly concludes Bond B (7%) > Muni TEY (6%) on after-tax basis	TEY calculation correct; comparison conclusion missing or reversed	Formula wrong or comparison not made	/4
Part (d) — Rate Risk & Recommendation	Correctly identifies Bond A (10-yr Treasury, sold at discount, longer effective duration) as most price-sensitive; clear inverse price-yield explanation; sound portfolio recommendation	Identifies correct bond; explanation of duration/price relationship incomplete	Wrong bond identified or no duration concept used	/6

Extended Response Total: — / 20

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Bonds & FixedIncome Valuation

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Bonds & Fixed
Income Valuation