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ECMA06_Tutorial_8_Solution

# ECMA06_Tutorial_8_Solution - ECMA06 Tutorial#8 Answer Key...

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ECMA06 Tutorial #8 Answer Key Question 1 Suppose the interest rate is 10%: Part (a) If you have \$1000 today, after 4 years you will have: \$1000(1 + 0.1) 4 = \$1464.10 Part (b) If you are promised \$8000 in 8 years, then the value of promise today, \$X: \$8000 = \$X(1 + 0.1) 8 \$X = \$8000/(1 + 0.1) 8 = \$3732.06 Question 2 Part (a) This is a standard bone with a face value of \$100, a coupon rate of 12% and matures in 3 years. Part (b) If the current interest rate is 12%, the price of the bond is: PDV = + = n 1 t t t r) (1 Payment = ( 29 1 0.12 1 \$12 + + ( 29 2 0.12 1 \$12 + + ( 29 3 0.12 1 \$112 + = \$100 Since the current interest rate is the same as the coupon rate, the bond will sell at par (i.e., at its face value). Part (c) If the current interest rate is 10%, the price of the bond is: PDV = + = n 1 t t t r) (1 Payment = ( 29 1 0.10 1 \$12 + + ( 29 2 0.10 1 \$12 + + ( 29 3 0.10 1 \$112 + = \$104.97 Since the current interest rate is less than the coupon rate, the bond will sell at a premium (i.e., above its face value).

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