Question

Solve the first 3 questions three ways: using the PV formula “long-hand;” conceptually or short essay; using the financial calculator. Try variants of each: e.g., given the price, solve for ytm. Notice the bond’s “risk class” is described in three different ways (in bold) in these questions.

1. What is the price of a 2-year bond with a coupon rate of 12% and an interest rate of 10%? Face value is $1,000. There are six months before the first interest payment.
   1. $1,019   
   2. $1,060   
   3. $965   
   4. $1,035   
   5. $1,000

2. What would you be willing to pay today for a $1000 par value bond with an 8% coupon and maturing in 12 years, assuming you wanted to earn a 9% annual rate of return.    Any shortcuts?

1. $   928
2. $1,090
3. $1,316
4. $1,960

3. What is the price of a $1000 face value bond that matures in two years with an 8% coupon rate paid semiannually. The current yield to maturity on similar bonds is 6%, and is not expected to change.

1. $ 148.68
2. $ 888.48
3. $1030.00
4. $1037.17

What does the zero-coupon bond's price do as it nears maturity?   Explain

Answer 1

Usig financial calculator,

1. Correct option: d - $1035

N = 2 * 2 = 4 (six-monthly payments)

PMT = 12%/2 * 1000 = 60

I/Y = 10/2 = 5

FV = 1000

PV -> CPT = 1035.46

2. Correct option: a - $928

N = 12

PMT = 8% * 1000 = 80

I/Y = 9

FV = 1000

PV -> CPT = 928.39

3. Correct option: d - $1037.17

N = 2 * 2 = 4 (six-monthly payments)

PMT = 8%/2 * 1000 = 40

I/Y = 6/2 = 3

FV = 1000

PV -> CPT = 1037.17

4. As a zero coupon nears maturity, the price increases approaching the face value of the zero coupon bond.

Zero coupon bonds has offers no interest payments during the lifetime of the bond. During the term, it trades at a discount to the par and as the bond approaches its maturity, the value increases upto the face value of the bond.