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Unformatted text preview: F301 – Spring 2011 Page 1 of 4 F301 Problem Set 3 SOLUTIONS Spring 2011 Write your answers on a separate sheet of paper. You do not need to return this page. Remember to show your work. If you use the TVM keys on your calculator, write down which number you entered into which TVM key. Each question is worth 3 points. 24 points possible. 1. A bond with a face value of $1,000 is now priced in the secondary market at 95.4% of face value. The bond issue pays coupons on a semiannual basis, has eight years left till maturity, and carries a coupon rate of 7.6%. What is the yield to maturity on the bond? Make the semiannual adjustments: N=Years × 2; PMT=Annual coupon ÷ 2; YTM=semiannual rate × 2 Method 1: Compute using dollar amounts: Method 2: Compute using percent of face value (percent of par): 2. Two bonds are selling today for face value. Each carries an 8% coupon rate, payable semiannually. Bond A has 5 to maturity, and Bond B has 25 years to maturity. Tomorrow, market interest rates shift downward, and the YTM on each bond decreases by 2%. Compute the bond prices before and after the rate decrease, and the percent price change for each bond. Based on this example, what can you conclude about the relationship between time to maturity and the sensitivity of bond prices to rate fluctuations? Please limit your answer to one declarative sentence . Bond prices before the rates change: $1,000 since they are selling at face value....
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