Question

1. Find the price of a three year, 7% coupon bond that is yielding 6%. The principal is 1000

2. Timco bonds are currently valued at 1015. They have 4 years until maturity and the coupon rate is 4%. What is the yield?

3. Last year Timco paid a 2 dividend. We think that next year they will pay a 2.26 dividend. What is Timco's capital gains yield?

Answer 1

1)	Present Value = Future value/ ((1+r)^t)
	where r is the interest rate that is 6% and t is the time period
	Price of bond = sum of present values of future cash flows
	Face value	1000
	Coupon rate	7%
	Annual Coupon	70
	Year	1	2	3
	cash flow	70	70	1070
	present value	66.04	62.30	898.39
	Sum of present values	1026.73
	The price of the bond = $1026.73
2)	Present Value = Future value/ ((1+r)^t)
	where r is the yield and t is the time period
	Price of bond = sum of present values of future cash flows
	Price of bond = $1015
	Face value	1000
	Coupon rate	4%
	Annual Coupon	40
	Using excel find the yield so that the price of the bond equals 1015
	Yield/r	0.0359
	Year	1	2	3	4
	cash flow	40	40	40	1040
	present value	38.61	37.28	35.98	903.15
	Sum of present values	1015
	The yield is equal to 3.59%