Question

**QUESTION 1**

ABC Inc. issued 10-years bonds paying 6% coupons semi-annually. What should be the price of the bond if the market demands a 10% yield to maturity? Show equation and work.

a. $827.08 |
||

b. $828.81 |
||

c. $802.07 |
||

d. $803.64 |
||

f. $750.76 |

**QUESTION 2**

A 10-year bond paying 10% coupon semi-annually is selling for $1000. What is the yield demanded by investors? Show equation and work.

a. 12% |
||

b. 6% |
||

c. 11% |
||

d. 5.50% |
||

e. 10% |

**QUESTION 3**

If the expected inflation rate is 6% and the real rate is 3%, what should be the nominal rate of a risk-free government bond? Show equation and work.

a. 8.12% |
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b. 9.18% |
||

c. 9.14% |
||

d. 10.21% |
||

e. 8.07% |

Answer #1

Question 1

Market value of bond = Present value of coupon payments + Present value of face value of bond

Semi-annual coupon payment = $1,000 * 6% * ½ = $30

Maturity of bond = 10 years

Number of semi-annual coupon payments = n = 10 years * 2 = 20

Semi-annual yield to maturity = r = 10%/2 = 5% = 0.05

Present value of annuity = Annuity
amount*{1-(1+r)^{-n}}/r

Present value of semi-annual coupon payments = $30 *
(1-1.05^{-20})/0.05 = $373.87

Present value of face value of bond = $1000/1.05^{20} =
$376.89

Market value of bond = $373.87 + $376.89 = $750.76

*Hence, correct answer is f.
$750.76*

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