Question
Instructions Leave all answers in TWO decimal places . For the boxes in Question 1 through 5, put calculator input numbers in the second row
Instructions
Leave all answers inTWO decimal places.
For the boxes in Question 1 through 5, put calculatorinputnumbers in thesecond rowand your computedanswerin thethird row.
Question 1 thru 5cash flow sign conventions: negative PV [assuming we are buying bonds]. Therefore PMT and FV are positive numbers [receiving periodic coupons and receiving face value at maturity].
All bonds have aface value of $1,000.Assume that allcoupon payments are made annuallyunlessthe problem specifically states otherwise.
Some additional notes and guidance at the end of the document.
1)What is the current value of a 30-year bond with a 4% coupon rate if the current market interest rate is 5.00%?
N
i
PV
PMT
FV
?
?
?
?
= ?
2)A zero coupon bond is sold at a discount and pays no cash interest during its lifetime. At maturity it pays the face value of the bond.What is the current value of a 10-year zero coupon bond if the current market interest rate is 4.00%?monkey2
N
i
PV
PMT
FV
?
?
?
?
= ?
3)What is the current value of a 20-year bond with a coupon rate of 6% (annual) withsemi-annualcoupon payments if the current market interest rate is 3.0% (annual)? [The coupon frequency is explicitly stated here because we want to compare this PV(bond) to the next question. Everything else being equal, the frequency of coupons DO affect the price of the bond.]
N
i
PV
PMT
FV
?
?
?
?
= ?
4)What is the current value of a 15-year bond with a coupon rate of 5% withquarterlycouponpayments if the current market interest rate is 6.0%?
N
i
PV
PMT
FV
?
?
?
?
= ?
5)What is the Yield to Maturity (YTM) and the Yield to Call (YTC) for a bond which is currently priced at $975 if the bond has a coupon of 6%, matures in 10 years but could be called at a price of $1,025 in 5 years?Spring2 Fall2
Calculate YTM:
N
YTM
PV
PMT
FV
?
?
?
?
= ?
Calculate YTC:
N
YTC
PV
PMT
FV
?
?
?
?
= ?
monkey2
6a)In each of theblue cellsbelow, calculate the value of the respective bonds with variouscombinations of market interest rate, coupon rate, and maturity assumptions:
[assumeannualcoupons; $1,000 face value]
[you can leave the following bond prices as positive numbers; easier to calculate % change]
Market Interest Rate = 5%
Maturity
10-Yr
30-Yr
Scenario1
2016 Spring2
1% coupon
What value?
What value?
5% coupon
1,000.00
1,000.00
8% coupon
What value?
What value?
Market Interest Rate = 2%
Maturity
10-Yr
30-yr
Scenario2
1% coupon
What value?
What value?
5% coupon
What value?
What value?
8% coupon
What value?
What value?
In each of thered cellsbelow, calculate the respective change in bond value from Scenario1 to Scenario2:
% change in Bond value from Scenario 1 to 2
Maturity:
10-Yr
30-Yr
1% coupon
% change?
% change?
5% coupon
% change?
% change?
8% coupon
% change?
% change?
6b)What do you conclude about the relativesensitivity of bond pricesto changes in interest rate?
[Hint: use the above calculated numbers to make comments on the following comparisons with regard to how sensitive are bond price changes when its market interest rate changes]
1)Longer maturitiesrelative to shorter maturities?
Put your response here ....
2)Higher couponbonds relative to lower coupon bonds?
Put your response here ....
2016 Spring2 Financial Concepts Assignment 8 Bond Pricing Student Name: Step by Step Solution
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Financial Accounting The Impact on Decision Makers
Authors: Gary A. Porter, Curtis L. Norton
9th edition
ISBN: 130565417X, 1305654174, 9781285972572 , 978-1285182964
