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Homework_3 - FIN340 HOMEWORK#3 BOND VALUATION AND MULTIPLES...

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1 FIN340 HOMEWORK #3 BOND VALUATION AND MULTIPLES 1. As with most U.S. government bonds, all the bonds in this question pay coupons semiannually. Suppose that the yield curve is flat at 3%. What is the price of a ten-year Treasury bond with a $1000 face value and with… a. a 2% coupon? b. a 4% coupon? c. a 3% coupon? d. What do you conclude about the relationship between a bond’s price and its face value when the coupon rate is (higher than / lower than / equal to) the prevailing level of interest rates (yields) in the economy? 2. Assume that all of the bonds listed in the following table are default-free and that they differ only in their pattern of promised cash flows over time. Prices are quoted per $1000 of face value (i.e. you may assume that the face value of each bond is $1000). Assume that the coupon payments (if any) are annual. Coupon Rate Maturity Price Yield 0.0% 1 year 970.85 $ 0.0% 2 years 2.0% 2 years 6.0% 2 years 4.00% a. Use the information in the table and your understanding of consistent bond valuation to infer the values of the missing entries. Explain each step verbally and show
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