Question

1. A 10 year bond pays a 10% coupon payment annually. Assuming the bond has 7 years until maturity and the discount rate is 14%, what should be the current price of the bond?

            a.   $754.31

            b.   $814.45

            c.   $1,000

            d.   $828.47

2. Based on the efficient frontier graph, which of the following portfolios is the only portfolio that could exist for investors?

            a.   4% risk, 8% return

            b.   7% risk, 10% return

            c.   17% risk, 26% return

            d.   24% risk, 40% return

            e.   Any of the above portfolios may be valid for investors

Answer 1

Answer 1

Coupon Interest rate = 10%

Par value of bond =. $1,000.00

Interest per coupo(1000*10%) = $100.00

YTM rate 14.00%

No. of years to Maturity. 7

Calculation of purchase price of bond @ 14% YTM

Annual Interest received = 100.00

Cumulative P.V.F. @ 14% for 7 Years =

(1- ((1/(1.14)^7)))/0.14 4.288304839

Present value of interest received (100*4.2883048) =$428.83

Maturity amount received =. 1000

P.V.F. @ 14 % for 7 th year =. 0.3996373225

(1/(1+0.14)^7)

Present value of Maturity amount(1000*0.3996373) = $399.64

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Price of bond $828.47

So, price of bond is $828.47

Answer D