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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