ps2f09 - Econ 340, Fall 2009 Problem Set 2 Chapter 3:...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Econ 340, Fall 2009 Problem Set 2 Chapter 3 : Questions 1-2, Quantitative Problems 1-3, 11, 13, 14. 1. $ 2000 = $100/(1 + i ) + $100/(1 + i ) 2 + . . . + $100/(1 + i ) 20 + $1000/(1 + i ) 20 . 2. If there is a decline in interest rates, you would rather be holding long-term bonds because their price would increase more than the price of the short-term bonds, giving them a higher return. However, long-term bonds have a greater interest-rate risk. And, this answer really depends on the duration of the bonds, not just there term to maturity. For example, a 5 year coupon bond might be subject to less interest rate risk than a 4 year zero coupon bond. Quantitative Problems 1. Calculate the present value of $1,000 zero-coupon bond with 5 years to maturity if the yield to maturity is 6%. Solution: PV = FV /(1 + i ) n , where FV = 1000, i = 0.06, n = 5 PV = 747.25 See Durationexamp.xls 3. Consider a bond with a 7% annual coupon and a face value of $1,000. Complete the following table: What relationship do you observe between yield to maturity and the current
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/07/2010 for the course ECON 101 taught by Professor Garton during the Spring '10 term at Edison College.

Page1 / 3

ps2f09 - Econ 340, Fall 2009 Problem Set 2 Chapter 3:...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online