{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Solution to Practice Problems for the Midterm Examination

# Solution to Practice Problems for the Midterm Examination -...

This preview shows page 1. Sign up to view the full content.

S OLUTION TO P RACTICE P ROBLEMS FOR THE M IDTERM 1. Given r 1 = 0.25%, r 2 = 0.5%, r 3 = 1%, and r 4 = 1.1%, the price of a 4-year 3 7/16% coupon bond is P 0 = \$3.4375/1.0025 + \$3.4375/1.005 2 + \$3.4375/1.01 3 + \$103.4375/1.011 4 = \$109.1774. 2 (i). Given that y, the yield to maturity on a 25-year 3.75% bond is 7.5%, we can work out its price as P 0 = \$3.75*AF(7.5%, 25) + \$100 = \$58.19895. 2 (ii). The value of your investment at t=25 is \$58.19895*1.075 25 = \$354.91698. 2 (iii). The profit you make is \$354.91698 – \$58.19895 = \$296.71803. 2 (iv). The amount you earned as coupons is 25*\$3.75 = \$93.75. It forms \$93.75/\$296.71803 = 31.59565% of the total profit. 2 (v). The amount you earned as capital gains is \$100 – \$58.19895 = \$41.80105. It forms
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: \$41.80105/\$296.71803 = 14.087802% of the total profit. 2 (vi). The amount you earned as reinvestment income is \$296.71803 – \$93.75 – \$41.80105 = \$161.16698. It forms \$161.16698/\$296.71803 = 54.316545% of the total profit. 3 (i). Given that D 1 = \$2, r = 13.5% = 0.135, and g = 9.5% = 0.095, we can work out that P = \$2/(0.135 – 0.095) = \$50. 3 (ii). Given that P = \$100, D 1 = \$4, and r = 0.15, we can work out that g = r – D 1 /P = 0.15 – \$4/\$100 = 0.11 = 11%. 3 (iii). Given that P = \$120, r = 20% = 0.2,and g = 16% = 0.16, we can work out that D 1 = P *(r – g) = \$120*(0.2 – 0.16) = \$4.80....
View Full Document

{[ snackBarMessage ]}

Ask a homework question - tutors are online