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Fixed-Income+Securities+Solution

Fixed-Income+Securities+Solution - FINA 3104 Practice...

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FINA 3104 Practice Problems Fall 2011 Fixed-Income Securities (Suggested Solution) 1. True or False (a) A coupon bond that pays interest semi-annually is selling at par value and has a coupon rate of 5.6%. Without knowing the maturity, the discount rate of this bond cannot be determined. Solution: False. The bond is selling at par and the discount rate is equal to the coupon rate. The discount rate is therefore 5.6%. (b) Consider a 5-year bond with a 10% coupon that has a present discount rate of 8%. If interest rates remain constant, one year from now the price of this bond will be lower. Solution: True. The bond is selling at premium because the discount rate is lower than the coupon rate. It is currently selling at a price higher than the face value. One year from now the price will be lower and closer to the face value. (Note: the price of any discount or premium bond will be closer to the face value when it is closer to the maturity date, if the interest rates remain constant.) (c) A zero-coupon bond may sell at premium. Solution: False. A zero-coupon bond cannot be sold at premium because the discount rate cannot be negative. 2. Bond Pricing (a) Calculate the price of a 20-year bond with an annual coupon rate of 5% (paid semi- annually). The interest rate is constant at 7% APR (Annual Percentage Rate). The face value is $100.
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