Question

A.

Bond E has the following features:

         Face value = $1,000,        Coupon Rate = 7%,        

Maturity = 5 years, Yearly coupons

         The market interest rate is 3.35%

If interest rate remains at 3.35% for the life of the bond (i.e., 3.35 years), what is the price of Bond E in year 3?

B.

Bond A has the following features:

         Face value = $1,000,       

Coupon Rate = 6%,       

Maturity = 10 years, Yearly coupons

         The market interest rate is 5.10%

What is the current yield for bond A from today to year 1?

Calculate your answer to 2 decimal places (e.g., 5.23)

C.

Bond A has the following features:

         Face value = $1,000,       

Coupon Rate = 5%,       

Maturity = 9 years, Yearly coupons

         The market interest rate is 7.34%

If interest rates remain at 7.34%, what is the percentage capital gain or loss on bond A if you sell the bond in year 1?

State your answer to 2 decimal places (e.g., 3.56, 0.29)

If there is a capital loss make sure to include a negative sign in your answer (e.g., -0.23)

Answer 1

A ) Present Value = ( C * Pvifa , k, n ) + ( Face Value * Pvif , k, n)

( 70* 2.8097, 3.35% , 3 years) + ( 1000 * 09059, 3.35% , 3yrs)

196.679 + 905.9= 1102.879

present value = 1102.88

Coupon payment =70

PVIFA = present value intest factor anually =2.8097

Pvif = PV Interest factor= 0.9059

k = market intest rate =3.35%

n = time period =3

B. Current Yield = annual coupon payment / Current market price

= 60 / 1000 = 0.06 =6%

Current Yield = 6%

C.

i) if sell after one Year

Present Value = ( C * Pvifa , k, n ) + ( Face Value * Pvif , k, n)

( 50* 0.9316, 7.34% , 1 years) + ( 1000 * 0.9316, 7.34% , 1yrs)

46.58 + 931.6= 978.18

present value = 978.18

the percentage capital gain or loss on bond A if you sell the bond in year 1 = 2.18%

ii) If sell after 9 year

Present Value = ( C * Pvifa , k, n ) + ( Face Value * Pvif , k, n)

( 50* 6.4220 , 7.34% , 9years) + ( 1000 * 0.5286, 7.34% , 9yrs)

321.1 + 528.6= 849.7

present value = 849.7

the percentage capital gain or loss on bond A if you sell the bond in year 9= 15.03%