Zero coupon bond- $1,000(Face Value) $0(Coupon) 10 years(Maturity)

Fixed payment bond- $0(Face Value) $100(Coupon) 10 years (Maturity)

Coupon bond- $500(Face Value) $50(Coupon) 10 years(Maturity)

A) Calculate the total, nominal dollar amount promised by each bond without accounting for the time value of money.

B)Assume the above three bonds are risk free because they are issued by the US treasury. Calculate their respective intrinsic values assuming a risk free rate of 1%. 3

C)Why do the three bonds have different intrinsic values?

D)Calculate the difference between the values from A) and B). What does this difference represent?

E)Recalculate the intrinsic values assuming that all bonds actually entail some credit risk because they are issued by a firm. Assume a uniform credit risk markup yr r of 4%.

F)Calculate the difference between the values from B) and E). What does this difference represent? What would it represent if we had used yY TM r instead of yr r in h)?