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extraproblems_7

# extraproblems_7 - 1 A \$15,000 bond with annual coupons is...

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1. A \$15,000 bond with annual coupons is redeemable at par in 5 years. This bond costs \$15,000 and has an annual e/ective yield to maturity of 4%. Determine the annual coupon amount. P = F = ) r = j = 4% = ) Fr = 15000 ( : 04) = 600 : 00 2. A \$2000 4% bond with semi-annual coupons is redeemable at par in 5 years. Calculate the price of the bond to yield an investor 6.2% compounded semi-annually. F = C = 2000 ; r = 4% 2 = 2% ; Fr = 2000 ( : 02) = 40 ; j = 6 : 2% 2 = 3 : 1% P = 40 a 10 j 3 : 1% + 2000 (1 : 031) ° 10 = 1813 : 29 3. Joan buys a \$1000 4% bond with semi-annual coupons which is re- deemable at par in 10 years. Joan pays a price for the bond which is based on a yield to maturity of 5% compounded semi-annually. After recieving six coupons, she sells the bond to Kirsten for \$1000. Calculate both Joan°s and Kirsten°s internal rates of return. Joan pays P = 20 a 20 j 2 : 5% + 1000 (1 : 025) ° 20 = 922 : 05 Joan NPV: 0 = ° 922 : 05 + 20 a 6 j j + 1000 (1 + j ) ° 6 solve for j = ) j = 3 : 461000213 = ) i (2) = 6 : 922% Kirsten°s NPV: 0 = ° 1000 + 20 a 14 j j + 1000 (1 + j ) ° 14 solve for j = ) j = 2 = ) i (2) = 4% (same as the coupon rate) Note the premium/discount formula P = F + F ( r ° j ) a n j j so P = F = ) j = r 4.

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