PMT

FV

Queson 1

You are considering buying a bond issued by the Omega Company. The corporate bond has a par value of $1,000 and three years to maturity. It pays an annual coupon of 6%. Other bonds issued by similar companies are yielding 8%.

Required:

a) Before you do any calculaons, do you believe the bond will trade at a premium, at par, or at a discount? Please explain your reason for your conclusion.

b) Calculate a fair value (bond price) for the Omega Company bond.

Queson 2

Zeta Co. placed bonds in the market that sll have 18 years le unl maturity. The bonds, which offer a 4.3% annual coupon, are currently selling at a price of $870 each. (Remember that bond prices are always quoted using a base $1,000 par value)

a) Before you do any calculaons, do you believe the YTM will be higher, at par, or lower than the coupon rate of the bonds? Explain why.

b) Calculate the current YTM.

Queson 3

There are currently two bonds trading in the market. Alpha Bond pays a 3% semi-annual coupon. Gamma Bond pays a 9% semi-annual coupon. Both bonds mature in 15 years, and the YTM of similar bonds is 6%.

a) What would be the price of each bond if interest rates were to increase by 2%?

b) What would be the price of each bond if interest rates were to decrease by 2%?

Queson 4 (Please review slides 38-40 and textbook Chapter 7, 7.6 Inflaon and Interest Rates to help you complete this queson.)

John has a meeng with you as his financial advisor. Before the meeng, he told you that he wants to have $2 million in his account by the me he reres in 40 years and wants to know how much he should be saving annually to meet his goal.

a) If the nominal rate is 10% and the inflaon rate is 3.8%, what is the real rate of return?

b) Assuming the $2 million is in real dollars (i.e. taking inflaon into account), much will you tell him he needs to deposit each year to achieve his goal?