MA170wk12solns - MA170 Week 12 Report Bonds Name: Solutions...

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Name: Solutions Lab: Fall 2010 1. [8 marks ] A $5000 3-year par bond includes coupons at j 2 = 12% : The bond is priced at $4819.87 to yield j 2 = 13 : 5% : (a) Is this bond bought at premium or discount? Determine the amount of premium or discount. As P < C , the bond is selling at a discount. Amount of discount = C P = 5000 4819 : 87 = $180 : 13 (b) Construct the appropriate bond schedule. Show all your calculations in at least the ±rst 2 lines of the table. Time Coupon Interest Book Value Book (years) Earned Adjustment Value 0 4819 : 87 0.5 300 (4819 : 87) (0 : 0675) = 325 : 34 300 325 : 34 = 25 : 34 4819 : 87 + 25 : 34 = 4845 : 21 1 300 (4845 : 21) (0 : 0675) = 327 : 05 300 327 : 05 = 27 : 05 4845 : 21 + 27 : 05 = 4872 : 26 1.5 300 328 : 88 28 : 88 4901 : 14 2 300 330 : 83 30 : 83 4931 : 97 2.5 300 332 : 91 32 : 91 4964 : 88 3 300 335 : 13 35 : 13 5000 : 01 Total 1800 1980 : 14 180 : 14 (c) What amount of money will the investor pay tax on over the term of the bond? The investor will have to pay tax on $1980.14 instead on the $1800 received in coupons.
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This note was uploaded on 03/03/2012 for the course MATH 170 taught by Professor F.vinette during the Fall '11 term at Wilfred Laurier University .

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MA170wk12solns - MA170 Week 12 Report Bonds Name: Solutions...

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