aeco350_hw_ans

# aeco350_hw_ans - Answers to HW1 AECO350 Q1...

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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 year-end 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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Answer: 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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## This note was uploaded on 10/13/2009 for the course AECO 350 taught by Professor Georgemonokroussos during the Spring '08 term at SUNY Albany.

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aeco350_hw_ans - Answers to HW1 AECO350 Q1...

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