PART A

Bill buys a $45000 face value bond.The coupon rate on the bond is 10% and it mature in 6 years. The current interest rate is 3.55% compounded daily (365 times per year).

a) How much should Bill pay for the bond?

b) Is he buying it at a premium or a discount? How much is the premium/discount?

c) Construct the first 4 rows of the amortization table for this bond.

d) How long (how many coupon periods) until the premium/discount on the bond is less than half the initial premium/discount?

e) What would the current interest rate have to be so that the initial premium/discount on the bond doubles?

PART B

A geometric annuity, an arithmetic annuity, a level pay annuity and a level pay perpetuity all have the same present value. All 4 annuities pay monthly and are annuities immediate. The interest rate is 3.85% compounded annually. The first 3 (not counting the perpetuity), all end in 9 years.

The perpetuity has level payments of $900. The geometric annuity has a growth rate of 1.65% per period. The arithmetic annuity's first payment is $Q and each subsequent payment increases by $Q.

a) What is the value of the perpetuity?

b) What is the amount of the payment for the level pay annuity?

c) What is the initial payment for the geometric annuity?

d) What is $Q for the arithmetic annuity?

e) If the interest rate changes to 2.85% (same compounding), which annuity makes the most (or loses the least) amount of money based on the new interest rate?