Question
1. Gotham City has been planning to develop a new warning system to make Batman aware of danger. The installation of the system costs more
1. Gotham City has been planning to develop a new warning system to make Batman aware of danger. The installation of the system costs more than what their budget allows so the mayor decide to issue a 15-year bond to finance the project. The bonds have a face value of $1,000 and it promises a coupon rate of 6.8% which will be paid quarterly to the bond holders.
a. Calculate the price you have to pay to purchase the bond if
i. The Yield to Maturity (YTM) is 6% (annually)
ii. The Yield to Maturity (YTM) is 8.4% (annually)
b. Lets assume you would like to buy 200 bonds issued by the Gotham City. If the YTM is 7.6% and the coupon rate is 6.8%, calculate how much more you have to pay when you purchase a bond which makes annual coupon payments rather than quarterly.
2. Consider the following three zero-coupon (discount) bonds:
Bond | Face Value | Time to Maturity | Market Price |
1 | $1,000 | One year | $924.64 |
2 | $1,000 | Two years | $841.53 |
3 | $1,000 | Three years | $744.59 |
a) Calculate the one-, two-, and three-year spot rates.
b) Calculate the forward rate over the second year and the forward rate over the third year.
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