Question 1. Consider a fixed rate bond with notional N, coupon c, start date T0 and maturity 10 years which makes semi-annual coupon payments. This bond pays Nc/2 semi-annually and notional N at maturity. The price P of a bond is the present value of its cash flow. The yield to maturity (YTM) at T0 of this bond is the value of r such that

c10 1 1 N P=N ++,

2 i=1 (1 + r/2)2i1 (1 + r/2)2i (1 + r/2)20

that is, the rate at which discounting the remaining payments gives the bond price.

a) FORD MOTOR CREDIT CO LLC issued bonds on Sept. 9, 2014 with notional $100, maturity Sept. 2024, coupon 3.664%, and semi-annual coupon payments. Suppose the YTM of the bond on Sept. 19, 2020 is 3.812%. What is the price of the bond today? You may assume there are 10 coupon payments remaining.

2. b) Suppose the bond is currently trading at a price of $98.00. What is the YTM given this new price?

3. c) If a bonds price rises will its yield increase or decrease? Explain why bond yields and prices move in opposite directions.