Ch.5 -Solutions to Extra Bond problems

Ch.5 -Solutions to Extra Bond problems - Extra Bond Review...

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Extra Bond Review Questions – Lecture 5 1. If you purchase a five-year, zero-coupon bond ($1,000 maturity value) for $500, how much could it be sold for three years later if interest rates have remained stable? a) $757.86 b) $888.43 c) $925.46 d) $800.00 Solution a) Step 1: Find the current YTM or i: Enter the variables into your calculator: Note: there is No PMT and no semi-annual compounding for a zero-coupon bonds: n = 5 annual periods remaining PV = -$500 (don’t forget the negative sign!) FV = $1000 COMP ‘i’ (or I/Y) You should get i = 14.8698% Step 2: Find the Price at end of Year 3 (Two years remaining on bond and market rates stay at 14.8698%! Enter the variables into your calculator: i = 14.8698 n = 2 FV = $1000 COMP PV You should get PV = -$757.86 2. Investors who own bonds having lower credit ratings should expect: a) lower yields to maturity. b) higher default possibilities. c) lower coupon payments.
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Ch.5 -Solutions to Extra Bond problems - Extra Bond Review...

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