# Chapter 6_Solutions_14thEdition.doc - Chapter6...

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Chapter 6Fixed Income Securities:  Characteristics and ValuationCHAPTER 6FIXED INCOME SECURITIES:CHARACTERISTICS AND VALUATION SOLUTIONS TO PROBLEMS:1. a.Po= I/kdI = \$1000 X .04 = \$40kd= .04Po= \$40/.04 =\$1000b.I = \$40kd= .05Po= \$40/.05 =\$800c.I = \$40kd= .06Po= \$40/.06 =\$666.672.a.kd= I/PoI = \$40Po= \$790kd= \$40/\$790 = 0.0506 (or5.06%)b.I = \$40Po= \$475kd= \$40/\$475 = 0.0842 (or8.42%)n3.a. Po=I/(1 + kd)t+ M/(1 + kd)nt=16-1Internal
Chapter 6Fixed Income Securities:  Characteristics and ValuationI = .0875 X 1000 = \$87.50kd= 0.07M = \$1000n = 12 years (2028 - 2016)12Po=87.50/(1 + 0.07)t+ 1000/(1 + 0.07)12t=1= 87.50(PVIFA.07,12) + 1000 (PVIF.07,12)= 87.50(7.943) + 1000 (0.444) =\$1139(tables and calculator)b.I = \$87.50kd= .09M = \$1000n = 1212Po=87.50/(1 + .09)t+ 1000/(1 + 0.09)12t=1= 87.50 (PVIFA0.09,12) + 1000(PVIF0.09,12)= 87.50(7.161) + 1000 (0.356) =\$983 (Tables)\$982 (Calculator)c.I = \$87.50kd= .11M = \$1000n = 1212Po=87.50/(1 + 0.11)t+ 1000/(1 + 0.11)12t=1= 87.50 (PVIFA0.11,12) + 1000(PVIF0.11,12)= 87.50(6.492) + 1000 (0.286) =\$854(tables and calculator)Solution to the last question in the problem:I = .0875(1000)/2 = \$43.75M = \$10006-2Internal
Chapter 6Fixed Income Securities:  Characteristics and Valuationkd= 0.08/2 = 0.04;n = 12 X 2 = 2424Po=43.75/(1 + 0.04)t+ 1000/(1 + 0.04)24t=1= 43.75(PVIFA0.04,24) + 1000(PVIF0.04,24)= 43.75(15.247) + 1000(0.390) =\$1057

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