1Practice - Optional Practice Problems Bonds & Equities...

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Optional Practice Problems Bonds & Equities Practice Question #1 The following table shows the prices of a sample of U.S. Treasury STRIPS in August 2006. Each STRIP makes a single payment of $1,000 at maturity (the coupon payments have been “stripped out” of the bond). a. Calculate the annually compounded, spot interest rate for each year. b. Is the term structure upward- or downward-sloping or flat? c. Would you expect the yield on a coupon bond maturing in August 2010 to be higher or lower than the yield on the 2010 STRIP? d. Calculate the annually compounded, one-year forward rate of interest for August 2008. Now do the same for August 2009. Maturity Price (%) August 2007 95.53 August 2008 91.07 August 2009 86.20 August 2010 81.08 Practice Question #2 A 10-year U.S. Treasury bond with a face value of $10,000 pays a coupon of 5.5%. The semi-annually compounded interest rate is 5.2%. a. What is the present value of the bond? b.
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This note was uploaded on 10/28/2011 for the course FIN 321 taught by Professor Smith during the Fall '08 term at University of Illinois at Urbana–Champaign.

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1Practice - Optional Practice Problems Bonds & Equities...

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