chapter 4 math practice Answers-2 - Economics 333 Math...

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Economics 333 - Math Practice (Chapter 3) ANSWERS 1. A \$10,000 Face Value Coupon Bond with a Coupon Rate of 6% and a 5-year maturity has a coupon payment of: Coupon Rate x Face Value = Coupon Payment 0.06 x \$10,000 = \$600 2. a) A \$8,000 Par Value coupon bond with a 6-year maturity and an annual coupon payment of \$400 has a coupon rate of: Coupon Payment/Face Value = Coupon Rate \$400/\$8000 = 0.05 = 5% b) If you purchase this bond at par (for \$8,000), what will be the interest rate? Interest Rate on a Coupon Bond purchased at Par (for the Face Value) equals the Coupon Rate = 5% c) If you purchase this bond for \$8,300, how would you determine the interest rate (set up but don't solve)? Is this rate higher or lower than the rate in part b)? Interest Rate is "i" when Bond Price =  t=1-6 Coupon Payment t /(1 + i) t + Face Value/(1 + i) t = maturity In this case it = i when: \$8,300 = \$400/(1+i) + \$400/(1+i) 2 + \$400/(1+i) 3 + \$400/(1+i) 4 + \$400/(1+i) 5 + \$400/(1+i) 6 + \$8,000/(1 + i) 6 This rate will be lower than the coupon rate because it was purchased for a price above face value So, i<5% 3. A Discount Bond with a Face Value of \$2,500 and a 1-year maturity has what interest rate

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