Problem 1: There Are Three Ways To Do Things A bond with face value $800 and an annual coupon of $40 has a maturity of 267 years! If the interest rates are 5% for every maturity, what is the price of the bond?

Problem 2: The Coupon Effect Interest rates are at 10% for every maturity. Consider a bond with face value $500, a coupon rate of 20% and a maturity equal to 2 years. 1. Price the bond if the coupon is paid annually. 2. Price the bond if the coupon is paid semiannually. 3. Compare your answers in (1) and (2). Is there a difference and why?

Problem 3: Competing Bonds Consider 3 bonds with the same face value ($1000) and maturity (3 years). All three bonds offer an annual coupon, but they have different coupon rates; ca = 6%, cb = 8% and cc = 10%. Interest rates are 8% for every maturity. 1. Price the three bonds. 2. Estimate the yield to maturity of the three bonds (Use excel, a financial calculator or..) If you use Excel, use the function RATE where Nper is the number of periods, Pmt is the annual coupon, Pv is the negative of the price and FV is the face value.

Problem 4: Zero-coupon vs Coupon A zero-coupon bond with maturity 1 year and face value $100 currently sells for 94.34$. A zerocoupon bond with maturity 2 years and face value $500 currently sells for 462.25$. 1. Estimate the yield to maturity of the 1-year zero-coupon bond. 2. Estimate the yield to maturity of the 2-year zero-coupon bond. 3. Using the yields you estimated in (1) and (2), price a 2-year coupon bond with F = 1, 000$ and c = 5% (paid annually). 4. Is the yield-to-maturity of the coupon bond above, below or exactly 5%?

Problem 5: Long-term Horizons Bond A with maturity 25 years and F = 5, 000$ pays an annual coupon X. It has yield to maturity 12% and currently sells for 5,235$. Bond B with F = 3, 000$ and an annual coupon of 350$ has also maturity 25 years. 1. Is the annual coupon of bond A above, below or exactly $600? 2. Price coupon bond B. 3. What should the annual coupon of B be, in order for it to sell at par?