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# hw1 - FIN 4243 Homework#1 Due on 1 Give three reasons why...

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FIN 4243 Homework #1 Due on 9/14/2009 1. Give three reasons why the maturity of a bond is important. 2. A pension fund manager knows that the following liabilities must be satisfied: Years from Now Liability (in millions) 1 2.0 2 3.0 3 5.4 4 5.8 Suppose that the pension fund manager wants to invest a sum of money that will satisfy this liability stream. Assuming that any amount that can be invested today can earn an annual interest rate of 7.6%, how much must be invested today to satisfy this liability stream? 3. Consider a bond selling at par (\$100) with a coupon rate of 6% and 10 years to maturity. (a) What is the price of this bond if the required yield is 15%? (b) What is the price of this bond if the required yield increases from 15% to 16%, and by what percentage did the price of this bond change? (c) What is the price of this bond if the required yield is 5%? (d) What is the price of this bond if the required yield increases from 5% to 6%, and by what percentage did the price of this bond change?

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