ASSIGNMENT 5

BOND MARKET AND BOND VALUATION

1. What is the price of a $100 face value , 4year, zero coupon bond if the market rate of interest of such risk free zero coupon bonds is 5.95%?

2. Consider a ten year bond with a face value of $1000 that has a coupon rate of 5.5%, with semiannual payments.?

a. What is the coupon payment for this bond?

b. Draw the cash flows for the bond on a timeline.

3.. The yield to maturity (rate of interest) of a $1000 bond with a 7% coupon rate, semiannual coupons, and two years to maturity is 7.6% APR , compounded semiannually. What must be its price?

4.. You have purchased a 10% coupon bond for $1040. What will happen to the bond s price if the market interest rates rise and why?

5. What is the yield to maturity (YTM) of a 5-year zero coupon, $100 face value bond which is currently priced at $74.55?

Note:

Remember the current price of the bond is same thing as the Present Value (PV) of the bond. As the price paid in market depends on how much present value it is offering.

YTM is market rate of interest (in bond terminology).

For question #4. I am looking for an explanatory answer on the relation of bond prices and interest rates, rather than a mathematical answer.

Face value of the bond means the future value of the bond as the face value is returned at the time of the maturity.