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MGMT 411
Fall 2009
1
MGMT 411
Homework 3
Due October 2, 2009
Time
Yield
Curve
1
0.04
2
0.05
3
0.06
4
0.07
5
0.08
1. Given the yield curve above, find the price of the following 2 bonds.
Assume that all
coupons/payments are annual.
Bond A: 5% coupon, 3 year maturity, $1000 par value
Bond B: 5 year $2000 mortgage with a 7% interest rate (Note: find the pmt first)
2. Find the yield to maturity, current yield and the discount/premium for each bond above.
Comment on the usefulness of the current yield measure of Bond B.
Is it useful? Why or why
not?
3. Calculate Macaulay’s Duration and Modified Duration for each of the bonds above.
Note
the time to maturity for each bond and the par value of each bond. Which Bond has a higher
Duration?
How can this be? Explain.
Additionally, use Modified Duration to calculate the
new price for each bond that would result from a 3% drop or a 3% rise in respective yields.
4.
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This note was uploaded on 11/03/2009 for the course MGMT 411 taught by Professor Clarke during the Spring '09 term at Purdue.
 Spring '09
 Clarke

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