FNCE303 Financial Markets and Institutions Problem Set 1 Problems 1. Explain the concept of "yield to maturity". 2. If the interest rate is 10%, what is the present value of a security that pays you $1,100 next year, $1,210 the year after, and $1,331 the year after that? 3. Which $1,000 bond has the higher yield to maturity, a 20-year bond selling for $800 with a current yield of 15% or a one-year bond selling for $800 with a current yield of S%? 4. The following table provides some information regarding the bonds A, B and C. Face Value Coupon Rate Time to Maturity Yield to Maturity Current Price Bond A $1.000 10% 12 years 11.25% Bond B $1,050 15% 15 years Bond $900 8% 2 years 7.5% $1.050 a. Current price of the Bond A is less than the current price of the Bond B. (True or False) b. Holding everything else constant, if the yield to maturity of Bond A falls to 10%, then we can be 100% sure that the current price of the Bond C is less than the current price of the Bond A without making any calculations. (True or False) c. If the price of the Bond B falls to $1,000, then its yield will be less than those of Bond A and Bond c. (True or False) 5. Given the information in Table 2 of Lecture Notes 2, find the "price next year" (4th column) for the bond having maturity of 5 years. FNCE303 Financial Markets and Institutions Problem Set 1 Problems 1. Explain the concept of "yield to maturity". 2. If the interest rate is 10%, what is the present value of a security that pays you $1,100 next year, $1,210 the year after, and $1,331 the year after that? 3. Which $1,000 bond has the higher yield to maturity, a 20-year bond selling for $800 with a current yield of 15% or a one-year bond selling for $800 with a current yield of S%? 4. The following table provides some information regarding the bonds A, B and C. Face Value Coupon Rate Time to Maturity Yield to Maturity Current Price Bond A $1.000 10% 12 years 11.25% Bond B $1,050 15% 15 years Bond $900 8% 2 years 7.5% $1.050 a. Current price of the Bond A is less than the current price of the Bond B. (True or False) b. Holding everything else constant, if the yield to maturity of Bond A falls to 10%, then we can be 100% sure that the current price of the Bond C is less than the current price of the Bond A without making any calculations. (True or False) c. If the price of the Bond B falls to $1,000, then its yield will be less than those of Bond A and Bond c. (True or False) 5. Given the information in Table 2 of Lecture Notes 2, find the "price next year" (4th column) for the bond having maturity of 5 years