Solutions to Practice Problems - Ch 12_13_14 (1)

# Solutions to Practice Problems - Ch 12_13_14 (1) - CHAPTER...

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CHAPTER 12 BOND PRICES AND YIELDS 4. Lower. As time passes, the bond price, which now must be above par value, will approach par. 13 . a. Initial price, P 0 = 705.46 [n = 20; PMT = 50; FV = 1000; i = 8] Next year's price, P 1 = 793.29 [n = 19; PMT = 50; FV = 1000; i = 7] HPR = = .1954 = 19.54% Note: if this bond paid semiannual coupons, you would receive two coupon payments and your calculation of holding period return would have to include reinvestment income earned on the first coupon. MS 24. April 15 is midway through the semiannual coupon period. Therefore, the total amount that you pay will be higher than the stated ask price by accrued interest which is an amount equal to one-half of the semiannual coupon. The ask price is 101.125 percent of par, so the invoice price is: \$1011.25 + ½ × \$50 = \$1036.25 CHAPTER 13 THE TERM STRUCTURE OF INTEREST RATES 10. The present value of each bond's payments can be derived by discounting each cash flow by rates from the spot interest rate (i.e., the pure yield) curve. Bond A: PV = + + = \$98.53 Bond A: PV = + + = \$88.36 Bond A sells for \$.13 (i.e., .13% of par value) less than the present value of its stripped payments. Bond B sells for \$.02 less than the present value of its stripped payments. Bond A seems to be more attractively priced. 13 . a . P = + = \$101.86 b. YTM = 7.958%, which is the solution to: + = 101.86

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[On your calculator, input n = 2; FV = 100; PMT = 9; PV = (–)101.86; compute i] c. The forward rate for next year derived from the zero-coupon yield curve is: 1 + f 2 = = 1.0901 which implies f 2 = 9.01%. Therefore, using an expected rate for next year of r 2 = 9.01%, we find that the forecast bond price is P = = \$99.99 d. If the liquidity premium is 1% then the forecast interest rate is : E(r 2 ) = f 2 – liquidity premium = 9.01% – 1% = 8.01% and you forecast the bond to sell at = \$100.92. 20 a. Five-year Spot Rate : 1000 = + + + + 1000 = + + + + 1000 = 66.67 + 63.24 + 58.69 + 53.08 + 758.32 = (1 + y 5 ) 5 = y 5 = – 1 = 7.13 % Five-year Forward Rate : 1 = 1.0701 – 1 = 7.01 % b. Yield to maturity is the single discount rate that equates the present value of a series of cash flows to a current price. It is the internal rate of return. The spot rate for a given period is the yield to maturity on a zero-coupon bond which
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Solutions to Practice Problems - Ch 12_13_14 (1) - CHAPTER...

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