1.Explain the relationship between a bond's yield and its price.(2 marks)

2.A 10 year bond has a yield to maturity of 4%. Which would result in the largest % change in the bond's price, a rise in the yield to 5% or a fall to 3%? Why?(2 marks)

3.Suppose a recently published report indicates inflation in both Canada and the U.S. is at an all time low and the Canadian dollar is strengthening. You hear a news report that the bond market has rallied (prices have increased). Which of the following Canadian bonds would likely show the highest % price increase? Why?(4 marks)

i.Low coupon, short-term

ii.High coupon, long-term

iii.High coupon, short-term

iv.Low coupon, long-term

Calculation Questions

4.Calculate the price of these bonds.SHOW YOUR WORK. (4 marks)

a) 2-year Quebec 5.00% semi-annual, $100 par value. Investors require a yield to maturity of 6% compounded semi-annually.

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N=

P/Y =

C/Y=

I/Y=

PMT=

FV=

PV =

b) 2-year Government of Alberta strip bond, $100 par value. Investors require a yield to maturity of 6% compounded annually.

Mode=

N=

P/Y =

C/Y=

I/Y=

PMT=

FV=

PV =

5.Calculate the yield to maturity for the following bonds. SHOW YOUR WORK. (4 marks)

a) 3-year Canada 5.50% semi-annual, priced at 98.14

Mode=

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P/Y =

C/Y=

PMT=

FV=

PV =

I/Y=

b) 11-year Canadian Tire 12.10% annual, priced at 139.20

Mode=

N=

P/Y =

C/Y=

PMT=

FV=

PV =

I/Y=

6.Calculate the annualized yield on a 91 day T-bill purchased at 98.5SHOW YOUR WORK. (2 marks)

Complete the sentences by deleting the inappropriate terms.(5 marks)

7.If interest rates are expected to rise, investors should buy [High / Low] coupon, [Long / Short] term bonds because they are less volatile and will therefore have a smaller % of [Income /Capital Gain / Capital Loss].

8.The difference between what commercial paper is purchased for, and what it matures at, is taxed as [Income / Capital Gain / Capital Loss].

9.Bond prices are more sensitive to a 1% change in yield when yields are initially [High / Low].