PART 3

Valuing Bonds

Answers to Trouble Sets

1 . a. Does not change

n. Price comes

c. Yield rises.

2 . a. If the coupon rate is more than the yield, then buyers must be

expecting a decline in the capital benefit of the connect over the remaining lifestyle. Thus, the bond's selling price must be greater than its deal with value.

w. Conversely, in the event the yield can be greater than the coupon, the purchase price will be below

face value and it will rise over the outstanding life from the bond. вЂ‚

3. The yield above 6 months can be 3. 965/2 = 1 ) 79825%.

Therefore , PV = 3/1. 0179825 & 3/1. 01798252 +вЂ¦. & 103/1. 017982534 = 140. 37 вЂ‚

4. Produces to maturity are regarding 4. 3% for the 2% discount, 4. 2% for the 4% promotion, and several. 9% for the 8% coupon. The 8% bond had the shortest duration (7. 65 years), the 2% relationship the greatest (9. '07 years). вЂ‚

5. a. Fall (e. g., 365 day 10% bond is worth 110/1. 1 a few 100 in the event that r five 10% and is also worth

110/1. 15 = ninety five. 65 if r = 15%).

b. Less (e. g., Observe 5a).

c. Less (e. g., with r = 5%, one year 10% connection is worth 110/1. 05 = 104. 76).

d. Bigger (e. g., if 3rd there’s r = 10%, 1-year 10% bond may be worth 110/1. one particular = 100, while 1-

year 8% bond is worth 108/1. 1 = 98. 18).

elizabeth. No, low-coupon bonds possess longer durations (unless there exists only one

period to maturity) and they are therefore even more volatile (e. g., if r declines from 10% to 5%, the value of a 2-year 10% bond increases from 95 to 109. 3 (a rise of 9. 3%). The value of a 2-year five per cent bond increases from 91. 3 to 100 (a rise of

9. 5%).

6. a. Spot rates of interest. Yield to maturity is a complicated normal of the

separate area rates of interest.

b. Bond rates. The relationship price is dependant upon the bond's cash goes and

the spot interest rates. Once you know the bond value and the bond's

cash goes, it is possible to calculate the yield to maturity.

7. a. 4%

b. PV = $1, 075. 44

8. a. PV

b. PHOTOVOLTAIC

c. Less (it is involving the 1-year and 2-year area rates).

on the lookout for. a. r1 = 100/99. 423 вЂ“ 1 =. 58%; r2 = (100/97. 546). 5 вЂ“ 1 = 1 ) 25%; r3 = (100/94. 510). 33 -. 1 = 1 ) 90%; r4 = (100/90. 524). 25 вЂ“ one particular = 2 . 52%.

b. Upward-sloping.

c. Lower (the yield within the bond is known as a complicated normal of the independent spot rates).

10. a. Price today is 108. 425; selling price after 12 months is 106. 930.

b. Return = (106. 930 1 8)/108. 425 - 1 =. 06, or 6%.

c. If a bond's yield to maturity is usually unchanged, the return to the bondholder is definitely

equal to the deliver.

вЂ‚eleven. a. Fake. Duration depends on the coupon as well as the maturity.

w. False. Provided the produce to maturity, volatility is proportional to duration.

c. True. A lesser coupon rate means for a longer time duration and for that reason higher movements.

d. Phony. A higher interest rate reduces the relative present value of (distant) principal repayments.

12.

13. 7. 01% (the extra return that you earn for investing for two years instead of one is 1 ) 062/1. 05 вЂ“ 1 =. 0701).

14. a. Real price = 1 ) 10/1. 05 вЂ“ you =. 0476, or 4. 76%

b. The real charge does not change. The nominal rate boosts to 1. 0476 x 1 . 07 вЂ“ 1 =. 1209, or 12. 9%.

15. With annual promotion payments:

в‚¬92. 64

of sixteen. a.

n.

Interestrate| PV ofInterest| PHOTO VOLTAIC ofFace value| PV of Bond| 1 ) 0%| $5, 221. fifty four | $9, 050. 63| $14, 272. 17

2 . 0%| four, 962. 53 | almost 8, 195. 44| 13, 157. 97

a few. 0%| 5, 721. 35 | several, 424. 70| 12, 146. 08

5. 0%| some, 496. 64 | 6th, 729. 71| 11, 226. 36

your five. 0%| some, 287. 02 | 6, 102. 71| 10, 389. 73

6th. 0%| some, 091. thirty-one | five, 536. 76| 9, 628. 06

several. 0%| several, 908. 41 | five, 025. 66| 8, 934. 07

almost eight. 0%| a few, 737. 34 | 5, 563. 87| 8, 301. 21

on the lookout for. 0%| a few, 577. 18 | some, 146. 43| 7, 723. 61

12. 0%| a few, 427. 14 | several, 768. 89| 7, 196. 00

eleven. 0%| three or more, 286. thirty six | a few, 427. 29| 6, 713. 64

doze. 0%| several, 154. twenty three | three or more, 118. 05| 6, 272. 28|...

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