FIN350 Exercise

  1. What is the value of a 10-year, 10% annual coupon bond, if interest rate/discount rate/YTM (r) = 10%?

N=10, PMT=100, FV=1000, I/YR=10, CPT PV=

Make sure your calculator sets 1 period in a year. To check the default setting, push “2nd” and then “I/YR”, you should see 1 instead of 12.

  1. For the same bond, if r decreases to 5%, what will be the bond price?

N=10 PMT= 100 FV=1000 I/YR= 5 CPT PV=

  1. For the same bond, if r increases to 15%, what will be the bond price?

N=10 PMT=100 FV= 1000 I/YR= 15 CPT PV=

  1. What is the value of a 1-year, 10% annual coupon bond, if r = 10%?

N=1, PMT=100, FV=1000, I/YR=10, CPT PV=

  1. For the same 1-year bond, if r decreases to 5%, what will be the bond price?

N= 1 PMT=100 FV= 1000 I/YR= 5 CPT PV=

  1. For the same 1-year bond, if r increases to 15%, what will be the bond price?

N= 1 PMT=100 FV=1000 I/YR= 15 CPT PV=

  1. To sum up your result:

r 10 yr bond 1yr bond

5%$1386 $1047

10%$1000 $1000

15%$749 $956

  1. From the above example I find that bond prices will ______(decrease/increase) when interest rate increases. In addition, the price of longer maturity bond is ______(more/less) sensitive to interest rate change than price of short maturity bond.
  1. I also find that if coupon rate is less than the interest rate, the bond will be selling at ______(discount/premium.) and vice versa.

10. / The long-term bonds issued by state and local governments in the United States are called:
A) / Treasury bonds.
B) / Municipal bonds.
C) / Floating rate bonds.
D) / Junk bonds.
E) / Zero coupon bonds.
11. / A bond that makes no coupon payments (and thus is initially priced at a deep discount to par value) is called a ______bond.
A) / Treasury
B) / premium
C) / floating rate
D) / junk
E) / zero coupon
12. / Your broker offers you the opportunity to purchase a bond with coupon payments of $90 per year and a face value of $1000. Coupon is paid annually. Maturity is 5 years. If the yield to maturity on similar bonds is 10%, this bond should:
A) / Sell for the same price as the bond of same maturity.
B) / Sell at a premium.
C) / Sell at a discount.
D) / Sell for either a premium or a discount but it's impossible to tell which.
E) / Sell for par value.
  1. What is the value of a 10-year, 10% annual coupon bond, if r = 10%?

N=10, PMT=100, FV=1000, I/YR=10, CPT PV=1000

Make sure your calculator sets 1 period in a year. To check the default setting, push “2nd” and then “I/YR”, you should see 1 instead of 12.

  1. For the same bond, if r decreases to 5%, what will be the bond price?

N=10 PMT= 100 FV=1000 I/YR= 5 CPT PV=$1386

  1. For the same bond, if r increases to 15%, what will be the bond price?

N=10 PMT=100 FV= 1000 I/YR= 15 CPT PV=$749

  1. What is the value of a 1-year, 10% annual coupon bond, if r = 10%?

N=1, PMT=100, FV=1000, I/YR=10, CPT PV=$1000

  1. For the same 1-year bond, if r decreases to 5%, what will be the bond price?

N= 1 PMT=100 FV= 1000 I/YR= 5 CPT PV=$1047

  1. For the same 1-year bond, if r increases to 15%, what will be the bond price?

N= 1 PMT=100 FV=1000 I/YR= 15 CPT PV= $956

  1. To sum up your result:

r 10 yr bond 1yr bond

5%$1386 $1047

10%$1000 $1000

15%$749 $956

  1. From the above example I find that bond prices will _decrease______(decrease/increase) wheninterest ratekd increases. In addition, the price of longer maturity bond is ______(more/less) sensitive to interest rate change than price of short maturity bond.
  1. I also find that if coupon rate is less than the interest rate, the bond will be selling at ______(discount/premium.) and vice versa.

10. / The long-term bonds issued by state and local governments in the United States are called:
A) / Treasury bonds.
B) / Municipal bonds.
C) / Floating rate bonds.
D) / Junk bonds.
E) / Zero coupon bonds.
11. / A bond that makes no coupon payments (and thus is initially priced at a deep discount to par value) is called a ______bond.
A) / Treasury
B) / premium
C) / floating rate
D) / junk
E) / zero coupon
12. / Your broker offers you the opportunity to purchase a bond with coupon payments of $90 per year and a face value of $1000. Coupon is paid annually. Maturity is 5 years. If the yield to maturity on similar bonds is 10%, this bond should:
A) / Sell for the same price as the bond of same maturity.
B) / Sell at a premium.
C) / Sell at a discount.
D) / Sell for either a premium or a discount but it's impossible to tell which.
E) / Sell for par value.

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