ECO 350 • Money and Banking • Problem Set Answers
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Problem Set 1  Answer Key
Question 1
: Use the tables and formulae in your lecture notes to find the (sometimes approximate)
annual (nominal) yield to maturity for the following securities:
a)
(3 points) A fixed payments loan, making a payment of $42.90 each month for 27 years and
having a market value of $5,000.
For $5000, the monthly payment = $42.90; every $1000, the monthly payment = $42.90
× ($1000/$5000) = $8.58. Read from bond table, i = 9.50%. Or, use a calculator or
spreadsheet to solve for
i
in the following equation:
i = 9.495%
b)
(3 points) A discount bond, maturing in 9 years, with a face value of $6,000 and a market value
of $3705.78.
%
5
.
5
1
78
.
3705
$
6000
$
)
1
(
6000
$
78
.
3705
$
9
/
1
9
=

=
⇒
+
=
i
i
c)
(3 points) A share of common stock, with a constant annual yearend dividend of $382.5 and a
market value of $8,500.
This is equivalent to a consol. i = C/P
c
= $382.5/$8500 = 4.5%
Question 2
(5 pts): Using the bond table when necessary, find the coupon bond with the highest
market value. (Hint: in some cases, you will be able only to rank market values, rather than find them
exactly.)
Bond in part b) has the highest market value.
d)
A 10% coupon bond maturing in 8 years, with a face value of $750 and an (approximate)
annual yield to maturity of 10.50%;
The market value for a 10% coupon bond maturing in 8 years with a face value of
$1000 = $973.4. So, the market value for such a bond with a face value of $750 =
$973.4 × ($750/$1000) = $730.05.
Or, use a calculator or spreadsheet to compute
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 Spring '09
 Chen
 Market Value

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