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 |
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b. $828.81 |
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c. $802.07 |
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d. $803.64 |
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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% |
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b. 6% |
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c. 11% |
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d. 5.50% |
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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% |
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c. 9.14% |
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d. 10.21% |
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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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