This case is only for use by students in the Spring 2023 FIN311 course. You may not share with others or disseminate this case in any form or way.

Case 1 Aspis Securities, Inc.

Aspis Securities, Inc. provides financial analysis and information about publicly traded securities. You work as an analyst for Aspis. The firm’s owner, George Stein, is preparing to make a presentation to the firm’s clients and has asked you to provide some input regarding the bonds of KLX, a publically traded company. To simplify calculations, assume that it currently is January 1, 2023. Regarding KLX’s existing bonds, George wants you to concentrate on the mortgage bonds in the Table below. These bonds were issued at different times but each one of them had 20 years to maturity when first issued. KLX’s bonds pay interest semiannually, and each bond has a par value of $1000.

Table Bond Price per bond Coupon Rate Maturity Year Years to

Maturity* I $ 825.00 3.75% 2028 5 II 930.52 6.50 2033 10 III 1108.08 9.25 2038 15

* As of January 1, 2023.

Given the above information, George asked you to calculate: • The nominal annual yield to maturity (YTM) of each bond • The effective annual YTM of each bond • The current yield of each bond • The expected price of each bond on January 1, 2024, assuming interest rates do not

change • The capital gains (losses) yield of each bond for 2023, assuming interest rates do not

change • The total expected return of each bond for 2023, assuming interest rates do not change • The interest rate risk of each bond (George has asked you tabulate and graph your

results) • The yield to call for bond I, assuming it can be called after 4 years at $1010.

From past experience George knows that attendees raise several questions during his presentations. So, once he reviewed your calculations, George asked you to prepare answers to the following questions:

• Given that upon maturity each of KLX’s bonds pays $1,000, is bond I a better investment than bonds II and III?

• Which of KLX’s three bonds has the most interest rate risk? • How likely is it that KLX will call bond I?

This case is only for use by students in the Spring 2023 FIN311 course. You may not share with others or disseminate this case in any form or way.

• If interest rates do not change, what would happen to the price of each of KLX’s bonds between January 1, 2023 and the time each bond matures? George wants you to provide a graph which shows how the prices of these bonds change between now and their time to maturity.

Finally, assume the YTM of bond III remains unchanged until January 1, 2025. Consider an investor who buys bond III on January 1, 2025 and keeps it for three years. In addition, the investor deposits all coupon interest payments from the bond in a bank account that pays 3% interest (compounded semi-annually) until the end of the 3-year investment period. At the end of the 3-year period the yield on bond III is 7.2% and the investor sells the bond and closes the bank account. Calculate:

• The total amount of money the investor will have at the end of the 3-year period • The annual rate of return the investors will get from the 3-year investment in bond III.

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