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Homework #3: Bond Valuation 1. A bond has a face value (principal) of $1,000. It pays interest annually with a coupon rate of 4%, and
Homework #3: Bond Valuation 1. A bond has a face value (principal) of $1,000. It pays interest annually with a coupon rate of 4%, and its maturity (term) is 10 years. Write out the equations and any assumptions behind your answers. A. [10 points] What is the interest payment each year? B. [10] Write out the equation for the bond's market value (price) = ?-1 $?* (1+27 Mon) + $? X (1+YTM%)? C. [20] What is the price of the bond at the end of year 4 if the YTM is 6%? D. [20] What is the price of the bond at the end of year 5 if the YTM is 7%? E. [20] What is the rate of return for holding the bond from year 4 to year 5 (from C and D above)? Hint: you buy the bond at the end of year 4 and sell it at the end of year 5. F. [20] If you pay $500 to buy the bond at the end of year 5 (based on the price in D), how much is the interest payment you should receive at the end of year 6
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