Question

Part 1: Problems (50 pts)

Show your work clearly and write down your financial calculator inputs. Report bond prices to the nearest .01, dollar amounts to the nearest dollar, and returns or yields to the nearest basis point. You do not need to express bond prices in 1/32^nd format.

1. You are considering purchasing a newly issued annual coupon bond with 3 years to maturity on the settlement date. The bond pays a coupon of 8% and will be priced with a yield-to-maturity of 5%, and you will purchase $10,000,000 par value. (30 pts)

1. What is the quoted price of the bond? How much will you need to pay at settlement?

2. What are the bond’s Macaulay duration and modified duration?

3. Assume you must sell the bond after 6 months have passed. The market yield-to-maturity is now 4.5%. Calculate the bond’s dirty price, clean price, and your proceeds from the sale.

Answer 1

Price of bond = $8638397.77

Macaulays duration = 2.99 years

Modified Duration = 2.94 years

Clean price = $10000000

Dirty Price = $10004383.56

for calculations and explanations, refer to images