Bonds & Inflation Practice Quiz - FIN 300 Bonds Inflation Practice Quiz 1 Given the following information about a bond calculate the fair market

Bonds & Inflation Practice Quiz - FIN 300 Bonds Inflation...

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FIN 300 Bonds & Inflation Practice Quiz 1.Given the following information about a bond, calculate the fair market price: Face/Par Value = $1,000 Coupons paid semi-annually Coupon rate = 8% 20 years left to maturity Yield-to-maturity (YTM) = 6% 2.Given the following information about a bond, calculate the fair market price: Face/Par Value = $1,000 Coupons paid semi-annually Coupon rate = 9% 30 years left to maturity Yield-to-maturity (YTM) = 12% 3.A bond currently sells for $1200. The bond has a face value of $1250, pays semi-annual coupons at a 8% coupon rate, and has 10 years left until maturity. Answer the following two questions and give a briefreason for your answer. There is no need for calculation. a.Is the yield-to-maturity (YTM) above, below, or equal to the coupon rate? b.If the bond’s price suddenly jumped to $1300, what must have happened to the yield-to-maturity (YTM)? 4.A zero-coupon bond pays $100 (face value) at maturity, exactly 5 years from today. You notice that the bond sells (today) at a price of $90. What must be the yield-to-maturity? On the other hand, if you noticed that the bond sold for $120 today, what would the yield to maturity be? (Assume all rates are annual) 5.A 10-year zero-coupon bond pays a $100,000 face value at maturity. If the bond’s yield-to-maturity is 10%, what would be a fair price for the bond? (Assume annual rates) 6.If the nominal interest rate is 10% and the inflation rate is -4%, what is the real rate of interest?
2 Formula Sheet Lump-sum: 𝑭𝑽 = 𝑷𝑽 ( 𝟏 + 𝒊 ) 𝒏 Ordinary annuities: 𝑷𝑽 𝒐𝒇 𝒐𝒓𝒅𝒊𝒏𝒂𝒓𝒚 𝒂𝒏𝒏𝒖𝒊𝒕𝒚 = 𝑪 𝒊 �𝟏 − 𝟏 ( 𝟏 + 𝒊 ) 𝒏 𝑭𝑽 𝒐𝒇 𝒐𝒓𝒅𝒊𝒏𝒂𝒓𝒚 𝒂𝒏𝒏𝒖𝒊𝒕𝒚 = 𝑪 𝒊 {( 𝟏 + 𝒊 ) 𝒏 − 𝟏 } Annuities due: 𝑷𝑽 𝒂𝒏𝒏𝒖𝒊𝒕𝒚 𝒅𝒖𝒆 = ( 𝟏 + 𝒊 ) 𝑷𝑽 𝒐𝒓𝒅𝒊𝒏𝒂𝒓𝒚 𝒂𝒏𝒏𝒖𝒊𝒕𝒚 = ( 𝟏 + 𝒊 ) 𝑪 𝒊 �𝟏 − 𝟏 ( 𝟏 + 𝒊 ) 𝒏 𝑭𝑽 𝒂𝒏𝒏𝒖𝒊𝒕𝒚 𝒅𝒖𝒆 = ( 𝟏 + 𝒊 ) 𝑭𝑽 𝒐𝒓𝒅𝒊𝒏𝒂𝒓𝒚 𝒂𝒏𝒏𝒖𝒊𝒕𝒚 = ( 𝟏 + 𝒊 ) 𝑪 𝒊 {( 𝟏 + 𝒊 ) 𝒏 − 𝟏 } Logarithms: 𝐥𝐧 𝒂 𝒏 = 𝒏 𝐥𝐧 𝒂 Effective Rate: 𝑬𝒇𝒇𝒆𝒄𝒕𝒊𝒗𝒆 𝒂𝒏𝒏𝒖𝒂𝒍 𝒓𝒂𝒕𝒆 ( 𝑬𝑨𝑹 ) = �𝟏 + 𝑨𝑷𝑹 𝒎 𝒎 − 𝟏 m = # of compounding periods per year APR = annual “quoted” rate Inflation: ( 𝟏 + 𝒓𝒆𝒂𝒍 𝒓𝒂𝒕𝒆 )( 𝟏 + 𝒊𝒏𝒇𝒍𝒂𝒕𝒊𝒐𝒏 𝒓𝒂𝒕𝒆 ) = ( 𝟏 + 𝒏𝒐𝒎𝒊𝒏𝒂𝒍 𝒓𝒂𝒕𝒆 )

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