SOLLUTION WEEK1 - FINS2624 Tutorial Solutions Ch 14 Ch14 Qn...

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
FINS2624 Tutorial Solutions Ch 14
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Ch14 Qn 3 The stated YTM and realized compound YTM of a (default- free) zero-coupon bond will always be equal. Why? Realized compound YTM = compound rate of growth of invested funds, assuming that all coupon payments are reinvested With zero-coupon bond - no coupons to be reinvested. V t is independent of the rate at which coupons could be reinvested. Hence, no reinvestment rate uncertainty with zeros. V 0 (1 + r ) t = V t
Background image of page 2
Ch14 Qn 4 Why do bond prices go down when i/r go up? Don t lenders like high i/r? When i/r go up, present value of future CF go down. Investors are not willing to pay as much for the bond (same coupon payment and face value), compared to when the market rates were lower.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Qn 8 C = 10% YTM = 8% If YTM remains constant, in 1 year, will the bond price be higher, lower, or unchanged? Is the bond currently trading at par, at a premium or at a discount? C > YTM
Background image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 10

SOLLUTION WEEK1 - FINS2624 Tutorial Solutions Ch 14 Ch14 Qn...

This preview shows document pages 1 - 5. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online