3) Suppose there is a 2-year bond that pays an interest payment of $60 at the end of the first year and then pays another interest payment of $60 plus the $1,000 face value at the end of year two when it matures. The interest payment is known as a coupon payment, and therefore, bonds that pay interest are known as coupon bonds. Since this bond pays its interest payments once per year, it is known as a 6% annual coupon bond. Notice that 6% of the $1,000 face value of the bond is equal to the $60 coupon payment.

a. The yield to maturity of a bond is the interest rate that equates the present discounted value of a bonds cash flows to its price. If this bond is selling for $950, find the yield to maturity of this bond algebraically. Be sure to show your work. Hint: You will have to use the quadratic formula to solve for the YTM.

Recall: If there is an equation in the following form: ax² + bx + c = 0 Then the quadratic equation gives x: x =

b. Use Solver in Excel to check your answer to part b. Please submit your Excel spreadsheet that has your Solver solution in a worksheet labeled Q2.

Excel Note: Recall that Solver is an Add-In that may not be loaded into Excel on your computer. Check out the materials for lecture 5 on the main course page on ELMS for instructions on adding in and using Solver.

4. Consider the following two projects both costing $5,000. Assume the prevailing interest rate is 7%. Project 1 pays $1,000 for 35 years. Project 2 pays $950 forever.

a. What is the present value of the *profits* (not just the revenues!) for each project? (Hint: Use an Excel spreadsheet to solve Project 1s PDV. Please submit this answer on a separate worksheet labeled Q4)

b. Based on your answer to part a, which project would the investor prefer?

c.If the interest rises to 8%, what happens to the value of the future cash flows for each project? Which project is affected more by this rise in interest rates? Why?

d. Use Solver to find the interest rate at which an investor would be indifferent between the two projects. Be sure to submit your Excel spreadsheet after you have saved the Solver solution. That way, the grader can open the Solver window and check the parameter values you entered into Solver. (Hint: One way to ensure that the value of the two projects is identical is to create a cell in Excel that is equal to the difference in values of the two projects. Then, choose the option in Solver to set that cell equal to zero. Equivalently, you can add a constraint to Solver that the values of the two projects are equal.)

Can anyone explain how to do this correctly and how to put it into excel correctly?