Question

1.

Which of the following bonds would have the highest percentage change in value if all interest rates in the economy decrease by 1%?

Group of answer choices

20-year, zero coupon bond.

20-year, 5% coupon bond.

10-year, zero coupon bond.

1-year, 10% coupon bond.

20-year, 10% coupon bond.

2.

Suppose you are signing a loan contract of $65,000 at an interest rate of 8.5%. You must make 5 equal payments at the end of the year for 5 years. How much would you still owe at the end of the first year, after you make the first payment?

Answer just the dollar amount without the + or - sign. Round to the nearest dollar.

3.

A public company's bonds have a $1,000 par value, mature in 25 years, pay interest semiannually, and sell at a price of $750. The nominal yield to maturity is 9.25%. What is the bond's nominal coupon interest rate?

Answer just the number without the % sign. Round to two decimal places.

Answer 1

1.Higher maturity and low coupon bonds will have higher price change for decrease in the interest rate because of maturity risk.

Here Option I, 20 year and Zero coupon bond will have higher price change because of no coupons and higher maturity

2. Use PMT function in EXCEL to find annual payment

=PMT(rate,nper,pv,fv,type)

rate=8.5%

nper=5 years

pv=65000

fv=0

=PMT(8.5%,5,-65000,0,0)=$16,494.77

Annual payment=$16,494.77

Please find the amortization schedule with formula.

The amount owe after one year=$54030.23

Periods	Opening Balance	Annual fixed payment	Interest amount=(Opening Balance*8.5%)	Principal amount=Annual payment-Interest	Ending Balance=Opening Balance-Principal
1	65000.00	16494.77	5525.00	10969.77	54030.23
2	54030.23	16494.77	4592.57	11902.20	42128.02
3	42128.02	16494.77	3580.88	12913.89	29214.13
4	29214.13	16494.77	2483.20	14011.57	15202.56
5	15202.56	16494.77	1292.22	15202.56	0.00

3. Use PMT funcction in EXCEL

=PMT(rate,nper,pv,fv,type)

remember that paymenst are semi-annual (2 periods in a year)

rate=9.25%/2=4.625%

nper=2*25=50  

pv=750

fv=face value=1000

=PMT(4.625%,50,-750,1000,0)=33.34

Annual coupon=2*33.34=66.68

Coupon rate=annual coupon/fac evalue=66.68/1000=6.67%