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Assignment 2 Solutions

Assignment 2 Solutions - ECON 305 A01/A02 Assignment 2 Due...

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ECON 305 A01/A02 Assignment 2 Due: September 30, 2011 Answer each of the following questions. Be sure to write your full name and student number on your assignment solutions along with your course section. Multiple pages must be stapled together or they will not be accepted. Late assignments will not be graded. 1. Consider two bonds. Each has a face value of $1000 and matures in 10 years. One has no coupon payments; the other pays $100 per year. a. Calculate the price for each bond if the interest rate is 4 percent and if the interest rate is 8 percent. Discount Bond 4% $675.56 8% $463.19 1 2 3 4 5 6 7 8 9 10 Coupon Bond 100 100 100 100 100 100 100 100 100 100 4% $1,486.6 5 $96.15 $92.46 $88.90 $85.48 $82.19 $79.03 $75.99 $73.07 $70.26 $67.56 8% $1,134.2 0 $92.59 $85.73 $79.38 $73.50 $68.06 $63.02 $58.35 $54.03 $50.02 $46.32 b. When the interest rate rises from 4 percent to8 percent which bond price falls by a larger percentage? Explain why? %change Discount -46% Coupon Bond -31% Bonds with lower coupon rates experience greater percentage price changes. Discount bonds have zero coupons and therefore have the largest price changes with an change in the interest rate.
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