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Chap9_solution

# Chap9_solution - expectations of future increases in rates...

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Suggested Solutions to Chap 9 Exercises Fin 367 Spring 2008 Professor Bing Han Chapter 9: 4. The bond price will be lower. As time passes, the bond price, which is now above par value, will approach par. 8. If the yield curve is upward sloping, you cannot conclude that investors expect short-term interest rates to rise because the rising slope could be due to either expectations of future increases in rates or the demand of investors for a risk premium on long-term bonds. In fact the yield curve can be upward sloping even in the absence of
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Unformatted text preview: expectations of future increases in rates. 9. a. The bond pays \$50 every six months. Current price: [\$50 × Annuity factor(4%, 6)] + [\$1000 × PV factor(4%, 6)] = \$1,052.42 Assuming the market interest rate remains 4% per half year, price six months from now: [\$50 × Annuity factor(4%, 5)] + [\$1000 × PV factor(4%, 5)] = \$1,044.52 b. Rate of return = months six per % 00 . 4 0400 . 42 . 052 , 1 \$ 90 . 7 \$ 50 \$ 42 . 052 , 1 \$ ) 42 . 052 , 1 \$ 52 . 044 , 1 (\$ 50 \$ = =-=-+...
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