sol1-2 - SYRACUSE UNIVERSITY MARTIN J. WHITMAN SCHOOL OF...

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SYRACUSE UNIVERSITY MARTIN J. WHITMAN SCHOOL OF MANAGEMENT Investments (FIN456) Professor David Weinbaum Problem Set 1: Solutions Exercise 1 (Bond Valuation) (a) The value of the bonds is the present value of the coupons and face value: (b) If the maturity of the bonds is 7 years This does not affect the value of the bonds. In economic terms, what is going on is as follows. When the coupon rate in a bond (which determines the numerator) is equal to the discount rate (which determines the denominator), the bond will always sell at par , i.e., its value is simply the face value. In such a case, the maturity of the bond does not affect its value. Note : This is something that we will come back to later in the class, when we discuss bonds and bond portfolios. (c) If the required rate of return on the part of the bondholders is 6% In economic terms, when interest rates go up, bond prices fall. (d) If the required rate of return on the part of the bondholders is 4%
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sol1-2 - SYRACUSE UNIVERSITY MARTIN J. WHITMAN SCHOOL OF...

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