FIN350
Exercise
1.
What is the value of a 10-year, 10% annual coupon bond, if interest rate/discount
rate/YTM (r) = 10%?
N=10, PMT=100, FV=1000, I/YR=10, CPT PV=
Make sure your calculator sets 1 period in a year. To check the default setting, push
“2
nd
” and then “I/YR”, you should see 1 instead of 12.
2.
For the same bond, if
r
decreases to 5%, what will be the bond price?
N=10
PMT=
100
FV=1000
I/YR=
5
CPT PV=
3.
For the same bond, if
r
increases to 15%, what will be the bond price?
N=10
PMT=100
FV= 1000
I/YR= 15
CPT PV=
4.
What is the value of a 1-year, 10% annual coupon bond, if r = 10%?
N=1, PMT=100, FV=1000, I/YR=10, CPT PV=
5.
For the same 1-year bond, if
r decreases to 5%, what will be the bond price?
N= 1
PMT=100
FV= 1000
I/YR=
5
CPT PV=
6.
For the same 1-year bond, if
r
increases to 15%, what will be the bond price?
N= 1
PMT=100
FV=1000
I/YR=
15
CPT PV=
7.
To sum up your result:
r
10 yr
bond
1yr bond
5%
$1386
$1047
10%
$1000
$1000
15%
$749
$956
8.
From the above example I find that bond prices will _ _________
(decrease/increase) when interest rate increases. In addition, the price of longer
1