Answers to HW1, AECO350
Q1
. http://www.federalreserve.gov/releases/, see h6.
Q2
. (6 pts)
Use the de&nition formula for credit market instruments to &nd the (some
times approximate) annual (nominal) yield to maturity for the following secu
rities:
(Hint: See the appendix for HW1, and you need a calculator)
a
.
(2 points) A coupon bond, maturing in 10 years, with a coupon rate
of 10 percent, a face value of $5,000 and a market value of $4,773.50.
P
=
C
1 +
i
+
C
(1 +
i
)
2
+
:::
C
(1 +
i
)
10
+
F
(1 +
i
)
10
4
;
773
:
50
=
500
1 +
i
+
500
(1 +
i
)
2
+
:::
500
(1 +
i
)
10
+
5
;
000
(1 +
i
)
10
i
10
:
72%
b
.
(2 points) A discount bond, maturing in 9 years, with a face value of
$7,500 and a market value of $4439.24.
Answer:
4439
:
24
=
7500
(1 +
i
)
9
i
6%
c
.
(2 points) A share of common stock, with a constant annual yearend
dividend of $280 and a market value of $3,500.
Answer: Treat this as a Consol.
i
=
C
P
c
=
280
3
;
500
= 8%
Q3
. (16 pts)
Consider a discount bond with a face value of $500 and a maturity date of
January 1, 2010.
a
.
(2 points) Suppose that on January 1, 2005, when the market±s (nom
inal) yield to maturity is 7.0 percent per year, you buy the bond at price P
1
.
What will P
1
be?
1
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View Full DocumentAnswer:
P
1
=
F
(1 +
i
)
5
=
500
(1 + 7%)
5
= 356
:
49
b
.
(2 points) Now suppose that on January 1, 2006 the market yield to
maturity is 5.0 percent. What will the new price, P
2
, be?
Answer:
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 Spring '08
 GEORGEMONOKROUSSOS
 equilibrium bond prices

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