econ423quiz5essayanswer - Solutions to Essay Questions...

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Solutions to Essay Questions Homework Quiz #5 Econ 423 1 14) (Mishkin and Eakins, p. 235, Question #2) Is a Treasury bond issued 29 years ago with six months remaining before it matures a money market instrument? Why or why not? Solution: Recall that Money market securities are defined as having an original maturity of less than one year. Even though this bond has only six months remaining until maturity, its original maturity is much longer than one year, so the bond would not be considered a money market security. 15) (Mishkin and Eakins, p. 257, Question #9) What is a sinking fund? Do investors like bonds that contain this feature? Why or why not? Solution: A sinking fund contains funds set aside by the issuer of a bond to pay for the redemption of the bond when it matures. Because a sinking fund increases the likelihood that a firm will have the funds to pay off the bonds as required, investors like this feature. As a result, interest rates are lower on securities with sinking funds. 16) (Mishkin and Eakins, p. 257, Quantitative Problem #15) A 10-year $1,000 par value bond has a 9% semi-annual coupon and a nominal yield to maturity of 8.8%. Explain how you would find the price of this bond, including any necessary formulas and any relevant number values listed above. Solution: Since this corporate bond pays interest semi-annually, we know that its price can be computed by using the following equation, which discounts the future cash flows from the bond’s coupon payments and face value using the yield to maturity:       n n semi i F i C i C i C P 2 2 2 2 1 2 1 2 ... 2
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This note was uploaded on 08/31/2009 for the course ECON 423 taught by Professor Vd during the Summer '08 term at UNC.

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econ423quiz5essayanswer - Solutions to Essay Questions...

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