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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 tenyear 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 defaultfree 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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This note was uploaded on 09/21/2009 for the course B 340 taught by Professor Narg during the Spring '09 term at Washington University in St. Louis.
 Spring '09
 Narg

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