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University of Southern California Marshall School of Business FBE 441: Investments - Spring 2010 Professor Pedro Matos Solutions to Additional Practice Questions for “Lecture 10 - Fixed Income” 1. A coupon bond that pays interest semi-annually has a par value of \$1,000, matures in 5 years, and has a yield to maturity of 10%. The intrinsic value of the bond today will be ________ if the coupon rate is 12%. A) \$922.77 B) \$924.16 C) \$1,075.80 D) \$1,077.22 E) none of the above Solution : D FV = 1000, PMT = 60, n = 10, i = 5, PV = 1077.22 2. Consider two bonds, A and B. Both bonds presently are selling at their par value of \$1,000. Each pays interest of \$120 annually. Bond A will mature in 5 years while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 10%, ____________. A) both bonds will increase in value, but bond A will increase more than bond B B) both bonds will increase in value, but bond B will increase more than bond A C) both bonds will decrease in value, but bond A will decrease more than bond B D) both bonds will decrease in value, but bond B will decrease more than bond A E) none of the above Solution : B , The longer the maturity, the greater the price change when interest rates change. 3.

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## This note was uploaded on 10/11/2011 for the course FBE 441 taught by Professor Callahan during the Fall '07 term at USC.

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