PS #3, solutions.docx

PS #3, solutions.docx - Finance 327 Professor Burnham...

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Finance 327 Professor Burnham Problem Set #3 Before class Parts A (bond math in excel), B (CAPM), and C (yield curve). Part A Bond Math in excel 1. Calculate the price of a 5.7% coupon bond with 22 years left to maturity and a market interest rate of 6.5%. Assume the principal is $1000 and interest payments are semiannual. Before you start calculating, is the answer greater or less than $1000? Answer : $907.05 – see spreadsheet. 2. A 5.65% coupon bond with 19 years left to maturity is offered for sale at $1,035.25. What yield is the bond offering? Again, assume the principal is $1000, and interest payments are semiannual. Before you start, is the yield above or below 5.65%? Answer : 5.35% -- see spreadsheet 3. Consider a 15-year bond that has a 5.5% coupon, has a principal of $1000, and interest payments are paid semiannually. If the current market yield for a bond of this type is 6.5%, and the bond is offered for sale to you for $940, should you buy this bond? Note: For this problem we are relaxing the assumption that the price of the bond must equal the value of the bond. You are given the price. So you must compute the value and then explain why you would or would not buy the bond (using the relationship between the bond’s price and value as your reasoning). Answer : The value of the bond should be $905.09 (see spreadsheet). If someone offering to sell you the bond at $940, they probably work for Goldman, Sachs & Co. and are trying to sell you the bond at too high of a price.
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