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Exercise1 Ch7&5

# Exercise1 Ch7&5 - FIN350 Exercise 1 What is the value...

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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

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