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Unformatted text preview: HOMEWORK #2 ECON 343 Due: September 24th 1. ( 2 points ) Calculate the rate of return, current yield and capital gain in each period (excluding the final period for return and gain) for the bond below supposing it has an annual coupon payment of $100. Period Price Return, t to t + 1 Gain, t to t + 1 Current yield,t 1 $1000 5%5% 10% 2 $950 14.74% 4.21% 10.53% 3 $990 16.16% 6.06% 10.10% 4 $1050 4.76%4.76% 9.52% 5 $1000 NA NA 10% 2. ( 2 points ) Suppose a bond with 5 years until maturity, an annual coupon of $200 and a face value of $5000 is priced according to its present value. Interest rates are the following at the beginning of each year over the next five years: 5%, 6% 7%, 5%, 4%. If the bond is priced according to present value,what is the price and current yield at the start of each year (Assume when discounting the buyer does not expect the prevailing interest rate to change.)? What is the return and capital gain from holding the bond one year to the next (save the last year)? Why are the prices changing? Year Interest rate Price Return, t to t + 1 Gain, t to t + 1 Current yield,t 1 5% $4783.53 1.46%2.72% 4.18% 2 6% $4653.49 3.28%1.01% 4.30% 3 7% $4606.35 10.87% 6.53% 4.34% 4 5% $4907.03 5.97% 1.89% 4.08% 5 4% $5000.00 NA NA 4.00% Prices change as the current yield relative to the prevailing interest rate changes, the number of coupon payments diminishes and as the maturity date gets closer.number of coupon payments diminishes and as the maturity date gets closer....
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This note was uploaded on 05/13/2010 for the course ECON 323 taught by Professor Jakes during the Spring '10 term at Alcorn State.
 Spring '10
 Jakes

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