Question

# QUESTION 1 ABC Inc. issued 10-years bonds paying 6% coupons semi-annually. What should be the price...

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% b. 9.18% c. 9.14% d. 10.21% e. 8.07%

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 = \$1000/1.0520 = \$376.89

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

Hence, correct answer is f. \$750.76

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