# Ch 3 ans - TUTORIAL FOR CHAPTER 3 WHAT DO INTEREST RATES...

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TUTORIAL FOR CHAPTER 3: WHAT DO INTEREST RATES MEAN AND WHAT IS THEIR ROLE IN VALUATION? Questions: 1. There are 4 types of credit instruments. Identify their major features. 2. How do you understand the concept of Present Value (PV) and how is it applied in valuation of all debt instruments? 3. What is the discount factor in the PV concept? What is the most accurate measure of interest rates? 4. Name 3 definitions of duration Problems: 1. What is the YTM on a \$1000 face value discount bond maturing in one year that sells for \$800? Answer: YTM = 25% 2. Suppose you want take the loan that has the following repayment schedule: \$1100 next year, \$1210 the year after and \$1331 the year after that. What is the amount of the loan you are going to take today if the interest rate is 10%? Answer: PV = 3000\$ (1100/1.1 +1210/(1.1) ² + 1331/*(1.1) ³) 3. At what price will you buy a 2 year 9% coupon bond with the face value of 1000\$ if the current YTM is 7%? Answer: PV = 1036.16\$ (90/1.07+ 90/1.07² + 1000/1.07²) 4. What is the price of the perpetuity (consol bond) that has a coupon of \$50 per year and a yield to maturity of 2.5%? If the yield to maturity doubles, what will happen to its price?

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