Economics 333  Second Test Math Practice
ANSWERS
1. A $10,000 Face Value Coupon Bond with a Coupon Rate of 6% and a 5year maturity has a
coupon payment of:
Coupon Rate x Face Value = Coupon Payment
0.06 x $10,000 =
$600
2. a) A $7,000 Par Value coupon bond with a 6year maturity and an annual coupon payment of
$350 has a coupon rate of:
Coupon Payment/Face Value = Coupon Rate
$350/$7000 = 0.05 =
5%
b) If you purchase this bond at par (for $7,000), what will be the interest rate?
Interest Rate on a Coupon Bond purchased at Par (for the Face Value) equals the Coupon Rate
=
5%
c) If you purchase this bond for $6,000, how would you determine the interest rate (set up but
don't solve)? Is this rate higher or lower than the rate in part b)?
Interest Rate is "i" when Bond Price =
Σ
t=16
Coupon Payment
t
/(1 + i)
t
+ Face Value/(1 + i)
t = maturity
In this case it = i when:
$6,000 = $350/(1+i) + $350/(1+i)
2
+ $350/(1+i)
3
+ $350/(1+i)
4
+ $350/(1+i)
5
+ $350/(1+i)
6
+ $7,000/(1 + i)
6
This rate will be higher than 5% because it was purchased for a price below face value
3. A Discount Bond with a Face Value of $2,000 and a 1year maturity has what interest rate
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 Spring '08
 D.Bowes
 Economics, $100, $250, $6,000, $500, $960

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