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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 10year $1,000 par value
bond has a 9% semiannual 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 semiannually, 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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 Summer '08
 VD

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