Homework 2 - As stated before PDF

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Homework Chapter 10

6.Wh yd ob on dp r i c e sg odo wnwhe ni n t e r e s tr a t e sg ou p?Do n ’ tbo nd i n v e s t or sl i ket or e c e i v ehi ghi nt e r e s tr a t e s ? Th ei n v e r s er e l a t i o ns h i pb e t we e nbo n dpr i c e sa n dt hei n t e r e s tr a t e s( y i e l d st o ma t ur i t y)i sbe c a us et h ehi gh e rt h ey i e l d s ,t h eh i g he rt h efix e dp a yme n t s( t h e c ou p on ) ,t hu sma k et heb o nd st ha tha st hel o we rc oup onp a yme n ti nt hes e c o nd a r y ma r k e t sl e s sa t t r a c t i v ea n dt hewou l dde v a l ueg r a d ua l l y . 7.T wobo n dsha v ei d e nt i c a lt i me st oma t u r i t ya n dc oup onr a t e s .Onei s c a l l a b l ea t10 5,t heot h e ra t1 10 .Whi c hs ho u l dha v et h eh i g h e ry i e l dt o ma t u r i t y ?Wh y ? Th eb o ndt h a tc a nbec a l l a b l ea to n l y1 0 5i smo r eb e ne fic i a lt ot hei s s ui n g c omp a n y ,a n dt h uss ho ul dbes ol da tar e l a t i v e l yl o wp r i c ec o mpa r e dt ot h ebo nd t h a th a sahi g he rc a l l a b l ep r i c e .Gi v e nt h i s ,t h e10 5on es h o ul dh a v et h eh i g h e r y i e l ds . 8.Co n s i de rab on dwi t ha1 0% c ou po na n dwi t hyi e l dt oma t ur i t y=8%.I ft he b on d ’ sYTM r e ma i n sc o ns t a n t ,t h e ni non ey e a rwi l lt h ebo n dpr i c eb e h i g he r ,l o we r ,o run c ha n g e d ?Wh y ? Th ec l o s e rt hebo ndt oma t u r i t y ,t h epr e s e n tv a l u eo ft h eb on dwo u l dbec l o s e rt oi t p a rv a l ue .Gi v e nt h i s ,t h eb on dc a r r i e swi t hahi g he rc ou po nr a t et ha ni t sy i e l d s ,i t s ho u l db ep r i c e da tp r e mi um a n dt h usi no ney e a rt heb o ndp r i c ewou l dbel o we r . 9.Ab on dwi t ha na n nu a lc o u po nr a t eo f4. 8 %s e l l sf o r$9 70 . Wha ti st he b on d ’ sc u r r e nty i e l d? Cu r r e nty i e l d=a n n ua lc ou po n /b o ndp r i c e =4 8/ 9 7 0=0. 0 4 9 15 . Tr e a s u r yb on dsp a y i n ga n8 %c o up o nr a t ewi t hs e mi a n nu alp a yme nt s c u r r e nt l ys e l la tp a rv a l u e .Wh a tc o up o nr a t ewou l dt h e yh a v et op a yi no r d e r t os e l la tp a ri ft he yp a i dt h e i rc ou po n sa nn ua l l y ? ( 1 . 0 4)^ 2=1. 08 1 61. 0 81 61 =0 . 81 6 =8 . 1 6% 16 . Con s i de rabo ndpa y i n gac o u po nr a t eo f10 %p e ry e a rs e mi a nn ua l l ywh e n t h e ma r k e ti nt e r e s tr a t ei son l y4% pe rha l f y e a r .Theb on dha st h r e ey e a r s u nt i l ma t ur i t y .

a. Fi n dt h eb on d’ sp r i c et o d a ya nds i xmo n t hsf r o mno wa f t e rt hene x t c ou po ni sp a i d.

PMT=1 0/ 2=5I =4n=6FV=10 0PV=1 05 . 2 4

PMT=5I =4n=5FV=10 0PV=-1 0 4. 45

17 . A2 0y e a rma t u r i t yb o ndwi t hp a rv a l ue$ 1 , 0 00ma k e ss e mi a nn u a lc ou p on p a yme nt sa tac ou p onr a t eof8%. Fi ndt heb o nde q ui v a l e nta nde ffe c t i v e a n nu a ly i e l dt oma t ur i t yo ft hebo ndi ft h eb o ndp r i c ei s : a.$ 95 0b . $1 , 00 0c . $1 , 0 5 0

9 50n=4 0PMT=40FV=1 00 0 a .PV=i =4 . 26 %*2 =8. 5 2% EAR=( 1+8. 5 2%/ 2)^ 2 1 =8 . 7 %

b .PV=1 00 0 , i =4%*2 =8% EAR=( 1+8 %/ 2)^ 2 1=8 . 1 6 %

c .PV=1 0 50n =40PMT=40FV=1 00 0 i =3. 76 %* 2=7 . 5 2% EAR=( 1 +7 . 5 2%/ 2 )^ 21 =7 . 66 %

32 . A3 0y e a rma t u r i t y ,8 %c o u po nb on dpa y i n gc ou p onss e mi a nn ua l l yi s c a l l a b l ei nfiv ey e a r sa tac a l lp r i c eo f$ 1 , 1 00 .Thebo ndc u r r e n t l ys e l l sa ta y i e l dt oma t ur i t yof7% ( 3 . 5 %p e rha l f y e a r ) . a.Wha ti st heyi e l dt oc a l l ?

b . Wh ati st h ey i e l dt oc a l li ft hec al lp r i c ei son l y$1 , 0 5 0? c .Wh a ti st h ey i e l dt oc a l li ft hec al lp r i c ei s$1, 10 0b utt h eb on dc anbe c a l l e di nt woy e a r si n s t e adoffi v ey e ar s ? a .N=30 *2 =60PMT=8 0 / 2=40FV=1 00 0I =3. 5% PV=11 2 4. 72 PV=11 24 . 72PMT=4 0N=5* 2 =1 0FV=1 10 0I =3. 37 % *2 =6. 7 4% b .FV=1 0 50PV=11 2 4. 72PMT=4 0N=10I =2. 98 %*2 =5. 9 6%

c .FV=11 00N=4PMT=4 0PV=1 12 4 . 7 2I =3. 0 3%=6 . 0 6%

36 . Un de rt h ee xp e c t a t i on sh y po t h e s i s , i ft hey i e l dc u r v ei sup wa r d s l op i n g , t h e ma r k e tmus te x pe c ta ni n c r e a s ei ns h o r t t e r mi nt e r e s tr a t e s . Tr u e / f a l s e / u n c e r t a i n ?Wh y ? Tr u e ,ba s e do nt h ee xp e c t a t i on sh yp o t he s i son l y , t heu p wa r ds l o pi n gc ou l do nl yb e t h er e s u l t st ha ti n v e s t or se xp e c tt hef u t u r es h o r tt e r mi n t e r e s tr a t e swou l db eh i gh e r .

37 .Theyi e l dc ur v ei su pwa r d s l op i ng .Ca ny o uc on c l u det ha ti n v e s t or se xp e c t s h or t t e r mi n t e r e s tr a t e st or i s e ?Wh yo rwh yn ot ? No, y o uc a n n otc o nc l u d et h ei n v e s t o r s ’e x p e c t a t i o ns i mp l yb e c a u s eoft h eu pwa r ds l o pi n gy i e l dc u r v e ,wh i c hi sno ton l yt h er e s u l toft h ee x pe c t a t i o nh yp o t he s e s . Be s i d e sf r o mt hei n v e s t o r s ’e xp e c t a t i on ,t h el i q ui di t ypr e f e r e n c et h e or ys u g g e s t s t h a tt he r es h o ul db ee x t r ac ompe n s a t i o nf o ri n v e s t or sf orho l d i ngl on g e rt e r m bo n ds g i v e nt h eg r e a t e rr i s k ,wh i c hma k e st h ey i e l dc u r v eu p wa r d s l o pi n gr e g a r dl e s sof i n v e s t or s ’e xp e c t a t i o n....