Question

1.What is the price of a 20-year bond paying 7 % annual coupons with a face (par) value of $1,000 if an 20-year bond making semi-annual payments and paying 7 % sells at par? Answer to the nearest cent, xxx.xx and enter without the dollar sign.

2.Suppose the interest rate on a 1-year T-bond is 6.3 % and that on a 3 year T-bond is 7.3 %.

Assuming the pure expectations theory is correct, what is the market's forecast for 2-year rates 1 year from now?

Enter your answer as a percentage and do not use the % symbol.

3.What is the price of a 19-year bond paying 6.1 % annual coupons with a face (par) value of $1,000 if the market rates for these bonds are 8.9 %? Answer to the nearest cent, xxx.xx and enter without the dollar sign.

Answer 1

1

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =20x2

Bond Price =∑ [(7*1000/200)/(1 + 7/200)^k]     +   1000/(1 + 7/200)^20x2

k=1

Bond Price = 1000

Using Calculator: press buttons "2ND"+"FV" then assign

PMT = Par value * coupon %/coupons per year=1000*7/(2*100)

I/Y =7/2

N =20*2

FV =1000

CPT PV

Using Excel

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

=PV(7/(2*100),2*20,-7*1000/(2*100),-1000,)