CHAPTER 5
BOND PRICES AND INTEREST RATE RISK
ANSWERS TO ENDOFCHAPTER 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 4year 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 3year maturity, 5 percent coupon
(semiannual 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 20year, 5 percent bond that has an original price of $1,000. In 5 years,
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 Spring '11
 Burns
 Interest Rates

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