Bond question - Finance 254 Bond Valuation Answers Problem 1(a FV = $1000 PMT =(0.05675*1000 = $56.75 N = 12 PV =-$952.45 solving for the interest

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Finance 254 Bond Valuation Answers Problem 1: (a) FV = $1000 PMT = (0.05675*1000) = $56.75 N = 12 PV = -$952.45 . . . solving for the interest rate, we find the yield to maturity is 6.25% (b) I = 5.75% PMT = (0.05675*1000) = $56.75 N = 12 FV = $1000 . . . solving for the present value, we find a bond price of $993.625 (c) IMPORTANT : A bond price, like all asset prices, is merely the present value of the cash flows received by owning that asset. Thus, like all present values, a bond price increases when interest rates decrease . (d) I = 6.25% PMT = (0.05675*1000) = $56.75 FV = $1000 N = 11 . . . solving for the present value, we find a bond price of $955.22 (e) The first guess might be to say that when the time to maturity decreases, other things equal, the price of the bond will increase. However, this is not always the case. Part (e) of Problem 2 will discuss this in more detail. Problem 2: (a) PMT = $28.125 (the 5 denotes the coupon rate; remember, corporate bonds pay semi-annual coupons) FV = $1000 (we will usually assume the par value is $1000, the most common amount for corporate bonds) N = 2*8 = 16 (the “11” in “TVA5 11” means the bond matures in 2011)
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This note was uploaded on 10/10/2009 for the course FIN Fin335 taught by Professor Tomjanson during the One '03 term at University of New England.

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Bond question - Finance 254 Bond Valuation Answers Problem 1(a FV = $1000 PMT =(0.05675*1000 = $56.75 N = 12 PV =-$952.45 solving for the interest

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