HW_Solutions

# HW_Solutions - Chapter 3 Answers to End-of-Chapter...

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Chapter 3 Answers to End-of-Chapter Questions Answers to End-of-Chapter Questions 2. You would rather be holding long-term bonds because their price would increase more than the price of the short-term bonds, giving them a higher return. 3. No. If interest rates rise sharply in the future, long-term bonds may suffer such a sharp fall in price that their return might be quite low, possibly even negative. Quantitative Problem 2. A lottery claims its grand prize is \$10 million, payable over 20 years at \$500,000 per year. If the first payment is made immediately, what is this grand prize really worth? Use a discount rate of 6%. Solution: This is a simple present value problem. Using a financial calculator: N = 20; PMT = 500,000; FV = 0; I = 6%; Pmts in BEGIN mode. Compute PV : PV = \$6,079,058.25 3. Consider a bond with a 7% annual coupon and a face value of \$1,000. Complete the following table: Years to Maturity Discount Rate Current Price 3 5 3 7 6 7 9 7 9 9

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What relationship do you observe between yield to maturity and the current market value? Solution:
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HW_Solutions - Chapter 3 Answers to End-of-Chapter...

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