Question 1 (20 marks)

You have just been appointed as the senior finance executive of MoreMoney International PLC. You estimate the following spot interest rates on Treasury bonds (usual face value of 1000):

Year Spot rate

1 r01 = 3.0%

2 r02 = 3.5%

3 r03 = 4.0%

4 r04 = 5.0%

5 r05 = 5.5%

The coupon rate is 11%, interest payable per annum and matures in 5 years.

1. What is the present value of the bond?

(5 marks)

2. Using the spot rate table above, calculate the value of Treasury bonds of 6% coupon rate, 5-year maturity bond and compare with the result of 12% coupon rate, 5-year maturity bond value.

(7 marks)

3. Use the spot rate table above to calculate the value of an 11% coupon rate, 5-year maturity bond with an increase of 0.5% spot rate each year relative to the rate table. Compare with your result in part (a).

(5 marks)

4. What if the bond is a zero-coupon bond with face value 1000, 5 years maturity with a fixed interest rate at 7%? Calculate the value of this bond.

(3 marks)