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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
⅝
denotes the coupon rate; remember, corporate bonds pay semiannual 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
⅝
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.
 One '03
 TomJanson
 Interest, Interest Rate, Valuation

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