Question

1. Consider the following supply and demand for money of an economy:

MS = 400 + 20i

MD = 2000 – 30i

Find the equilibrium interest rate.

2. Consider the following savings and investment functions of an economy:

S = 40 + 5i

I = 400 – 3i

Find the equilibrium interest rate.

3. Consider the following Treasury quote:

104-13+/24+. If you are the seller of the bond, at what price will you sell?

4. Consider a bond paying an annual coupon of $80 with a face value of $1,000. Calculate the yield to maturity if the bond has 20 years remaining to maturity and is priced at $1,200. What would be the holding period yield if the bond is held for 15 years and sold at $1,100?

5. Suppose that you bought a 14% Drexler bond with time to maturity of 9 years for $1,379.75 (semiannual coupons, interest rate=8%). After another ½ year, you sold the bond.

a. Assuming that the required rate of return remained at 8%, what would the selling price be? What is the rate of return from this investment?

b. Assuming that the required rate of return decreased to 7.5%, what would the selling price be? What is the rate of return from this investment?

6. Consider a five-year bond paying 10 percent coupon annually. The bond is priced at $1,200.

a. Find the yield to maturity.

b. Find the realized yield, assuming that coupons are reinvested at the yield to maturity.

c. Find the realized yield, assuming that coupons are reinvested at the following rates: r0=9%, r1=9.5%, r2=10%, r3=10.5%, r4=11%, r5=11.5%.

d. Refer to part (c). Explain why the yield is different than the yield to maturity.

7. An 8 1/2 30-year US corporate bond is callable in 12 years. It is currently sold at a price of $960. The call premium is 10 percent. The prevailing market interest rate at the call date is 8 percent.

a. What is the yield to call to an investor who does not reinvest the call price at the prevailing interest rate at the call date?

b. What is the yield to call to an investor who reinvests the call price at the prevailing interest rate at the call date?

8. Consider a 90-day Treasury bill whose price is 94.5%.

a. Find the yield on a discount basis.

b. Find the yield on a coupon equivalent basis. c. Find the effective yield.

Answer #1

Answer : 1) Given, money demand = 2000 - 30i

Money supply = 400 + 20i

At equilibrium, demand = supply

=> 2000 - 30i = 400 + 20i

=> 2000 - 400 = 20i + 30i

=> 1600 = 50i

=> i = 1600/50 = 32

Therefore, the interest rate at equilibrium is 32% .

2) Given , Saving (S) = 40 + 5i ;

Investment (I) = 400 - 3i

At equilibrium, Saving = Investment

=> 40 + 5i = 400 - 3i

=> 5i + 3i = 400 - 40

=> 8i = 360

=> i = 360/8 = 45

Therefore, the interest rate at equilibrium is 45%.

5. Suppose that you bought a 14% Drexler bond with time to
maturity of 9 years for $1,379.75 (semiannual coupons, interest
rate=8%). After another ½ year, you sold the bond.
a. Assuming that the required rate of return remained at 8%,
what would the selling price be? What is the rate of return from
this investment?
b. Assuming that the required rate of return decreased to 7.5%,
what would the selling price be? What is the rate of return from...

A 30-year maturity 10% coupon bond paying coupons semiannually
is callable in 10 years at a call price of $1,200. The bond
currently sells at a yield to maturity of 5%.
a) What is the selling price of the bond at present?
b) What is the yield to call?
c) Suppose that the investor decided to hold the bond only for 5
years. The reinvestment rate of coupon payments is 8.5%. The
forecasted yield to maturity by the end of...

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it after 10 years. The bond’s yield to maturity is 9.584% at time
of sale, and rises to 10.100% immediately after the purchase but
before the first coupon is received. All coupons are reinvested to
maturity at the new yield to maturity. Show the sources of return
below.
(a) Total coupon
payments:
(b) Reinvestment income from
coupons:
(c) Sale price...

14. An investor purchases a just issued 30-year, 10.500%
semi-annual coupon bond at 104.079 percent of par value and sells
it after 10 years. The bond’s yield to maturity is 9.584% at time
of sale, and rises to 10.100% immediately after the purchase but
before the first coupon is received. All coupons are reinvested to
maturity at the new yield to maturity. Show the sources of return
below.
Because the yield to maturity changed
between bond purchase and sale, the...

Zero-coupon bond. Wesley Company will issue a zero-coupon bond
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b. the maturity is 40 years?
c. the maturity is 60 years?
d. the maturity is 100 years?
Part B
Callable bond. Corso Books has just sold a callable bond. It is
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Suppose you purchase a 8-year, 6% semi-annual coupon bond for
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bond for 3 years and then sell it. All coupons will be reinvested
at the prevailing yield on equivalently risky bonds. What will be
your return on this investment in this scenario? Round your answer
to three decimal places.

Question 1 of 71
The yield to maturity on a coupon bond is …
· always greater than the
coupon rate.
· the rate an investor
earns if she holds the bond to the maturity date, assuming she can
reinvest all coupons at the current yield.
· the rate an investor earns
if she holds the bond to the maturity date, assuming she can
reinvest all coupons at the yield to maturity.
· only equal to the internal
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You just bought a newly issued bond which has a face value of
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Do you expect the bond price to change in the future when the
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2 marks)
Calculate what the bond price would be in one year if its...

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2. Consider a bond with a maturity of 5 years. The bond has a
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3. Consider a bond with a...

An investor purchases a just-issued 10-year, 9.500% semiannual
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