AProblemSet01

AProblemSet01 - ECO 350 Money and Banking Problem Set...

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ECO 350 • Money and Banking • Problem Set Answers 1 | Page ww.albany.edu~xl843228 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 year-end 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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AProblemSet01 - ECO 350 Money and Banking Problem Set...

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