HW Solutions (Chapter7)

HW Solutions (Chapter7) - 7-1A.Value (Vb)= ∑=+++121t

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Unformatted text preview: 7-1A.Value (Vb)= ∑=+++121t 12t.12)(1$1,000.12)(1$801212801000CPT→ANSWER-752.237-2A.If the interest is paid semiannually:Value (Vb)= 16161tt(1.04)$1,000(1.04)$45+∑=164451000CPT→ANSWER-1,058.26If interest is paid annually:Value (Vb)= ∑=+81t 8t(1.08)$1,000(1.08)$9088901000CPT→ANSWER-1,057.477-3A.$900 = ∑=+++201t 20btb/2)k(1$1,000/2)k(1$4020900401000CPT→ANSWER4.79%semiannual rateThe rate is equivalent to 9.6 percent annual rate compounded semiannually, or 9.8 percent (1.0482- 1) compounded annually.7-4A.$945 = 20b201t tb)k(1$1,000)k(1$90+++∑=20945901000CPT→ANSWER9.63%7-5A.$1,150 = ∑=+++121t 12btb)k(1$1,000)k(1$70121150701000CPT→ANSWER5.28%7-6A.a.$1,085 = ∑=+++151t 15btb)k(1$1,000)k(1$80151085801000CPT→ANSWER7.06%b.Vb= ∑=+151t 15t(1.10)$1,000(1.10)$801510801000CPT→ANSWER-847.88c.Since the expected rate of return, 7.06 percent, is less than your required rate of return of 10 percent, the bond is not an acceptable investment. This fact is also evident because the market price, $1,085, exceeds the value of the security to the investor of $847.88.7-7A.a.ValuePar Value$1,000.00Coupon$ 100.00Required Rate of Return0.12Years to Maturity15Market Value$ 863.78b.Value at Alternative Rates of ReturnRequired Rate of Return0.15Market Value$ 707.63Required Rate of Return0.08Market Value$1,171.19c.As required rates of return change, the price of the bond changes, which is the result of "interest-rate risk." Thus, the greater the investor's required rate of return, the greater will be his/her discount on the bond. rate of return, the greater will be his/her discount on the bond....
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This note was uploaded on 04/21/2008 for the course FINC 332 taught by Professor Ravi during the Spring '08 term at Loyola Chicago.

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HW Solutions (Chapter7) - 7-1A.Value (Vb)= ∑=+++121t

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