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Riccardo Colacito
Finance Division
Problem Set 1
Investments
Due date: Thursday, March 18 2010 in class
1. Calculate the values of the following two bonds. Assume that coupon interest payments
are made semiannually and that par value is $1,000 for both bonds.
Bond A
Bond B
Coupon Rate (semiannual)
5%
5%
Time to Maturity
5 years
25 years
Yield to maturity (semiannual)
7.2%
7.2%
Recalculate the bonds’ values if the yield to maturity changes to 9.4%. Which bond is
more sensitive to changes in the discount rate? Will this always be the case?
2. A bond with a coupon rate of 4.70% (
annualized
) is priced with a 6.30% (
annualized
)
yield to maturity. Coupon interest is paid semiannually. The par value is $1,000. The
bond has 5 years remaining until maturity. Assuming that market rates stay the same
over the next 5 years, calculate the value of the bond at the beginning of each year and
the amount of change in the bond’s value from year to year. Describe the behavior of
the bond’s value over time.
3. Suppose that you just purchased a 20year bond that pays an annual coupon of $40
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 Fall '09
 Strobl
 Interest

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