# ch05 sol - CHAPTER 5 BOND PRICES AND INTEREST RATE RISK...

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CHAPTER 5 BOND PRICES AND INTEREST RATE RISK ANSWERS TO END-OF-CHAPTER QUESTIONS 1. Brennan Alston deposits \$2000 in a savings account offering 6.25% compounded daily. After 4 years, assuming he makes no further deposits, what will be the balance in his account? The question requests the future value (FV) of a single present value (PV) of \$2000 growing at an annual percentage rate (APR) of 6.25%, compounded daily, for 4 years. Determine a daily rate and the number of compounding periods over the 4 years. Divide the rate by 365; multiply the annual periods by 365. FV = PV(1 + i) n FV = \$2000 (1 + .0625/365) 1461 FV = \$2000 (1.0001712) 1461 = \$2568.43 2. Write the equation which expresses the present value (or price) of a bond that has an 8% coupon (annual payments), a 4-year maturity, and a principal of \$1,000, if yields on similar securities are 10%. Calculator: 1000 FV 4 N 10 i 80 PMT PV = \$936.60 3. Find the price of a corporate bond maturing in 5 years that has a 5% coupon (annual payments), a \$1,000 face value, and is rated Aa. A local newspaper's financial section reports that the yields on 5 year bonds are: Aaa = 6%, Aa = 7%, and A = 8%. The price of the corporate bond (P b ) is: 4. What is the yield to maturity of a corporate bond with a 3-year maturity, 5 percent coupon (semi-annual payments), a \$1,000 face value, if the bond sold for \$978.30? Payments comprise an ordinary annuity of \$25 every 6 months for 3 years plus a lump sum of \$1,000 at end of 3 years. What discount rate equates this payment stream to \$978.30? 5.79% = i x 2. 5. Suppose you buy a 20-year, 5 percent bond that has an original price of \$1,000. In 5 years,

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ch05 sol - CHAPTER 5 BOND PRICES AND INTEREST RATE RISK...

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