COMM 371 Assignment 1 SOLUTIONS - Assignment 1 Yan(Alyssa)...

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Assignment 1Yan(Alyssa) Rong#162601351.define bonds:a.Catastrophe bonds: pay higher coupon but do not have or have a littleof payment if catastrophe happensb.Eurobond: a bond issued in a currency other than the country ormarket that it is issuedc.Zero-coupon bond: pay only principal with zero coupond.Samurai bond: Japanese bond issued in Tokyo by non-Japanese withyen dominatede.Junk bond: rated BBB or above, the new firm that seek financialinvestment to start up, showing a greater risk with a higher return onbonds.f.Convertible bond: can be exchanged for shares of the firm’s commonstockg.Serial bond: bond that has a serial of maturity daysh.Equipment obligation bond: A bond that is issued with specificequipment pledged as collateral against the bondi.Original issue discount bond: Original issue discount bonds are lesscommon than coupon bonds issued at par. These are bonds that areissued intentionally with low coupon rates that cause the bond to sellat a discount from par valuej.Indexed bond: Indexed bonds make payments that are tied to a generalprice index or the price of a particular commodityk.Callable bond: the bond that can be repurchased before the maturitydatel.Puttable bond: Give the holder an option to retire or extend the bond2.a. (100,000/97,645)^4 -1 = 0.100b. (1.05)^2 -1 = 0.1025Therefore the coupon bond has a higher effective annual interest rate3.the effective annual interest rate is (1+0.08/2)^2 – 1 = 0.0816. If it isselling at par then it must offer the same yield which is 8.16%.4.The callable one requires the payment of 105% of the face value if theissuing firm is calling back. 105% one is selling at lower price because thecall provision is more valuable to the issuing firm. Therefore, it has higheryield.5.The bond price will be lower. Since when time is passed, the price willgradually decrease and approach to par(as for now the price of bond isabove par since coupon rate is higher than yield).6.When n=3, PV=-953;FV = 1000; PMT= 80; COMP iAnd the YTM = 9.89%FV = ($80 *1.1 *1.12) + ($80 *1.12) + $1080 = $1268.16Then find the realized compound yield = (FV/PV)^(1/T) – 1 =(1268.16/953.1)^(1/3) – 1 = 9.99%And the YTM = 9.89%FV = ($80 *1.1 *1.12) + ($80 *1.12) + $1080 = $1268.16
Then find the realized compound yield = (FV/PV)^(1/T) – 1 =(1268.16/953.1)^(1/3) – 1 = 9.99%7.a. zero coupon: FV = 1000, N = 10, PMT = 0, I/YR = 8% so the presentvalue is 463.17

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