Question

Suppose there is a 15 year bond with at 5.5% coupon rate, paying coupons semi-annually, and a face value equal to $1000.  Suppose the yield to maturity is 6.5%,

and the bond is currently selling at $1050. Should you buy the bond? Explain.

Suppose you have obtained a $15,000 loan at an APR of 16%, with annual payments.

loan term is 5 years

Fill out the first year of the amortization schedule for this loan:

Year	Begin Balance	Total Payment	Interest Paid	Principal Paid	End Balance
1

Answer 1

1. First we have to find the intrinsic price of the bond using PV function in EXCEL

=PV(rate,nper,pmt,fv,type)

Please remember that the payments are semi-annual (2 periods in a year)

rate=yield to maturity/2=6.5%/2=3.25%

nper=total number of periods=2*15=30

pmt=semi-annual coupon=(coupon rate*face value)/2=(5.5%*1000)/2=55/2=27.5

fv=face value=1000

=PV(3.25%,30,27.5,1000,0)

the intrinsic price of the bond=$905.09

The bond is currently selling at $1050 which is much higher than the intrinsic value of $905.9. Hence don't buy the bond.

2. Annual payment formula=Loan amount*interest rate*((1+interest rate)^n)/[((1+interest rate)^n)-1]

Loan amount=15000

Interest rate=16%

n=number of years=15

Annual payment=15000*16%*((1+16%)^5)/[((1+16%)^5)-1]=2400*2.10/1.10=$4581.14

Please find the amortization schedule for Year1

Periods	Opening balance	Annual payment	Interest=(Opening balance*16%)	Principal=Annual payment-Interest	Ending balance=Opening balance-principal
1	15000.00	4581.14	2400.00	2181.14	12818.86