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# ric_ps1solution - Riccardo Colacito Finance Division...

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Riccardo Colacito Finance Division Problem Set 1 Investments Answer Key 1. When yield to maturity is 7.2%, the prices are P A = 1 . 072 parenleftbigg 1 - 1 1 . 072 10 parenrightbigg 50 + 1000 1 . 072 10 = 846 . 899 P B = 1 . 072 parenleftbigg 1 - 1 1 . 072 50 parenrightbigg 50 + 1000 1 . 072 50 = 703 . 892 When yield to maturity is 9.4%, the prices are P A = 1 . 094 parenleftbigg 1 - 1 1 . 094 10 parenrightbigg 50 + 1000 1 . 094 10 = 722 . 527 P B = 1 . 094 parenleftbigg 1 - 1 1 . 094 50 parenrightbigg 50 + 1000 1 . 094 50 = 537 . 156 P A decreases by 14.68%, while P B decreases by 23.68%. The longer term bond is more sensitive to a given change in the discount rate. This will always be the case. Mathematically, there are more terms in the equation for the longer-term bond that are influenced by the discount rate. Practically speaking, your money is tied up longer with longer term bond so you will experience greater capital losses when interest rates increase and greater capital gains when interest rates decrease. 2. The six month yield is 6.30%/2=3.15%. The semiannual coupon is \$47/2=\$23.50. The selling price of the bond is: P 0 = 1 . 0315 parenleftbigg 1 - 1 1 . 0315 10 parenrightbigg 23 . 50 + 1000 1 . 0315 10 = 932 . 277

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ric_ps1solution - Riccardo Colacito Finance Division...

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