Chapter 3 Class Problems and Solutions

Chapter 3 Class Problems and Solutions - Assume the bond...

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Corporate Finance Rutgers University CHAPTER 3 CLASS PROBLEMS 1. You are considering purchasing a bond at the end of this year. The bond’s interest payments ($105) are made annually and the bond matures in 5 years. If your required rate of return is 14%, what is the maximum price you would be willing to pay for this investment? SOLUTION: V B = $879.84 2. Using the same information as above, except that your required rate of return is 6%, what is the maximum price you would be willing to pay for this investment?
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Unformatted text preview: Assume the bond pays interest semiannually. SOLUTION: V B = $1,191.93 3. Based upon the information given below, calculate the bond’s duration: Face value = $1,000 Coupon rate = 10% Maturity = 3 years YTM = 5% PV = $1,136.16 SOLUTION: Duration = [(1)($95.24) / ($1,136.16) + (2)($90.70)/($1,136.16) + (3)($950.23)/ ($1,136.16] = 2.753 years 4. After you have found the bond’s duration, calculate its modified duration. SOLUTION: (2.753 years) / (1 + .05) = 2.62%...
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