Financial Concepts
Homework Assignment 7
Bond Pricing
Student Name: <put your name here>
Instructions
Leave all answers in TWO decimal places.
For the boxes in Question 1 through 5, put calculator input numbers in the second row and your
computed answer in the third row.
Question 1 thru 5 cash flow sign conventions: negative PV [assuming we are buying bonds].
Therefore PMT and FV are positive numbers [receiving periodic coupons and receiving face
value at maturity].
All bonds have a face value of $1,000. Assume that all coupon payments are made annually
unless the problem specifically states otherwise.
Some
additional
notes
and
guidance
at
the
end
of
the
document.
1) What is the current value of a 10-year bond with a 5% coupon rate if the current market
interest
rate
is4.00%?
N
?
i
?
PV
PMT
?
FV
?
=?
2) A zero coupon bond is sold at a discount and pays no cash interest during its lifetime. At maturity it
pays the face value of the bond. What is the current value of a 20-year zero coupon bond if the
current market interest rate is 5.00%?
N
?
i
?
PV
PMT
?
FV
?
=?
3) What is the current value of a 15-year bond with a coupon rate of 4% (annual) with semi-annual
coupon payments if the current market interest rate is 3.0% (annual)? [The coupon frequency is
explicitly stated here because we want to compare this PV(bond) to the next question. Everything
else being equal, the frequency of coupons DO affect the price of the bond.]
N
?
i
?
PV
PMT
?
FV
?
=?
4)
What is the current value of a 15-year bond with a coupon rate of 4% with quarterly coupon
payments if the current market interest rate is 3.0%?
N
?
i
?
PV
PMT
?
FV
?
=?
5) What is the Yield to Maturity (YTM) and Yield to Call (YTC) for a bond which is currently priced at
$1,025 if the bond has a coupon of 6%, matures in 10 years but could be called at a price of $1,050
in 6 years? Spring2 Fall2
YTM:
N
?
YTM
PV
?
PMT
?
FV
?
PV
?
PMT
?
FV
?
=?
YTC:
N
?
YTC
=?
6a) Calculate the Value of the Bonds under the following assumptions:
[assume annual coupons; $1,000 face value]
[you can leave the following bond prices as positive numbers; easier to calculate % change]
Market Interest Rate
= 4%
Maturity
1% coupon
30-Yr
What value?
4% coupon
7% coupon
Period 1
2015 Spring2
10-Yr
What value?
1,000.00
What value?
1,000.00
What value?
Market Interest Rate
= 2%
Maturity
1% coupon
30-yr
What value?
4% coupon
7% coupon
Period 2
10-Yr
What value?
What value?
What value?
What value?
What value?
% Change in Bond Value
from Period 1 to 2
Maturity:
1% coupon
4% coupon
7% coupon
N
?
i
?
10-Yr
PV
=?
30-Yr
PMT
?
FV
?
5) What is the Yield to Maturity (YTM) and Yield to Call (YTC) for a bond which is currently priced at
$1,025 if the bond has a coupon of 6%, matures in 10 years but could be called at a price of $1,050
in 6 years? Spring2 Fall2
YTM:
N
?
YTM
PV
?
PMT
?
FV
?
PV
?
PMT
?
FV
?
=?
YTC:
N
?
YTC
=?
6a) Calculate the Value of the Bonds under the following assumptions:
[assume annual coupons; $1,000 face value]
[you can leave the following bond prices as positive numbers; easier to calculate % change]
Market Interest Rate
= 4%
Maturity
1% coupon
10-Yr
What value?
30-Yr
What value?
4% coupon
7% coupon
Period 1
2015 Spring2
1,000.00
What value?
1,000.00
What value?
Market Interest Rate
= 2%
Period 2
Maturity
1% coupon
10-Yr
What value?
30-yr
What value?
4% coupon
What value?
What value?
7% coupon
% Change in Bond Value
from Period 1 to 2
Maturity:
1% coupon
4% coupon
7% coupon
What value?
10-Yr
What value?
30-Yr
