Practicequestionsposted

Practicequestionsposted - of face value) does it sell for...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
1. What is the value of a T- period annuity (payment of 1) if the interest rate is zero? Why can’t you use the formula? Do you need to know whether a period is a year or a month? 2. Convert an 8% APR with daily compounding to an APR with compounding every second. 3. How can we understand a regular T-period annuity in terms of perpetuities? 4. You will obtain $10000 in 10 year. Inflation is at 5%. The real interest rate is 6%. a) What is the purchasing power of $10,000 in terms of today’s price level? b) What is the present value of $10,000? 5. Compute the year-1 and year 2- spot rates given the bond prices of two government bonds. Both bonds offer a coupon rate of 5%. A bond with one year maturity trades at 100, the two year bond trades at 98.2115. 6. The US Treasury has a 30 year bond outstanding with a coupon of 5%. This bond was originally issued 5 years ago. What price (expressed at a percent
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: of face value) does it sell for today if its yield to maturity is 7%? [10] ( Assume, that interest rate payments are made annually and that the yield to maturity is quoted as an APR with annual compounding ) 7. Would you expect the yield to maturity on a 10 year government bond to be higher or lower than on a three month t-bill (under normal circumstances)? Explain! Note, that both face no risk of default. 8. Peter is happy about a job offer. He has the option to obtain the salary at the beginning or at the end of the respective month of work. How much higher/ lower must be the monthly payout of the late option relative to the early option to make him indifferent between accepting either contract? Assume a flat interest rate across all maturities!...
View Full Document

This document was uploaded on 10/08/2008.

Ask a homework question - tutors are online