HW4_-_Part_1_-_Solution_Manual_Financial_Mathematics

# HW4_-_Part_1_-_Solution_Manual_Financial_Mathematics -...

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SILABO – GERENCIA EMPRESARIAL Universidad Iberoamericana UNIBE Due Date : March 10, 2011 Deliver hard copy at the beginning of class and send the electronic file through email. Note: Use as exercises the study problems of chapter 6 that are in the photocopies of the book Foundations of Finance that is available at the photocopy office located in the basement of the FRA1 building at UNIBE. In all the problems set the student must provide a clear mathematical argument for the response. Otherwise a partial credit will be given for correct answers. Lecture 10: The Valuation and Characteristics of Bonds Study Problem Exercises: 23 Exercises Exercises: 7-5, 7-11, 7-12, 7-13, 7-16, 7-17, 7-18, 7-19 Note: For exercise 7-5 assumes face value of \$1,000 Exercise 6.2. Book: Mathematics of Money Exercises: 1, 3, 4, 10, 12, 13, 14, 16, 18, 20, 26, 27, 36, 37, 38 Page 1 of 13 FINANCIAL MATHEMATICS HOMEWORK 4: PART 1

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7-5 a. Series A: Value (V b ) = = + 12 1 t 12 12 (1.05) \$1,000 (1.05) \$85 Value (V b ) = = + 12 1 t 12 12 (1.08) \$1,000 (1.08) \$85 Value (V b ) = = + 12 1 t 12 12 (1.12) \$1,000 (1.12) \$85 12 = 5% 8% 12% 85 1000 ANSWER 1,310.21 1,037.68 783.20 Series B: Value (V b ) = = + 1 1 t 1 1 (1.05) \$1,000 (1.05) \$85 Value (V b ) = = + 1 1 t 1 1 (1.08) \$1,000 (1.08) \$85 Value (V b ) = = + 1 1 t 1 1 (1.12) \$1,000 (1.12) \$85 1 Page 2 of 13
= 5% 8% 12% 85 1000 ANSWER 1,033.33 1,004.63 968.75 b. Longer-term bondholders are locked into a particular interest rate for a longer period of time and are therefore exposed to more interest rate risk 7-11 7-11. a. Value Par Value \$1,000.00 Coupon \$ 100.00 Required Rate of Return 0.12 Years to Maturity 15 Market Value \$ 863 .78 b. Value at Alternative Rates of Return Required Rate of Return 0.15 Market Value \$ 707 .63 Required Rate of Return 0.08 Market Value \$1,171 .19 Page 3 of 13

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c. As required rates of return change, the price of the bond changes, which is the result of "interest-rate risk" Thus, the greater the investor's required rate of return, the greater will be his/her discount on the bond. Conversely, the less his/ her required rate of return below that of the coupon rate, the greater the premium will be. d.
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## This note was uploaded on 06/22/2011 for the course ALL 105 taught by Professor Laus during the Spring '11 term at FIU.

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HW4_-_Part_1_-_Solution_Manual_Financial_Mathematics -...

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