Bonds
1. The yield to maturity of a $1000 bond with a 7% coupon rate, six-monthly coupons, and
two years to maturity is 7.6% APR, compounded six-monthly. What is the Bond’s price?
2. The following table summarises prices of various default-free zero coupon bonds.
Maturity (years)
Price (per $100 face value)
1
$95.51
2
$91.05
3
$86.38
4
$81.65
5
$76.51
a. Calculate the yield to maturity for each bond
b. Plot the zero-coupon yield curve (for years 1-5)
c. Is the yield curve upward sloping, downward sloping or flat?
3. Consider the following Bonds with annual coupons
Bond
A
B
C
D
Coupon Rate
0%
0%
4%
8%
Maturity (years)
15
10
15
10
a. What is the percentage change in the price of each bond if its yield to maturity
falls from 6% to 5%?
b. Which of the bonds is most sensitive and least sensitive to a 1% drop in interest?
Provide an intuitive explanation for your answer
4. The following table summarizes the yields to maturity on several one-year, zero coupon
securities. Assume a face value of $100 for each bond
Security
Treasury Bond
AAA Corporate
BBB Corporate
B Corporate
a.
b.
c.
d.
Yield
3.1%
3.2%
4.2%
4.9%
What is the price of a one-year zero coupon corporate bond with an AAA rating?
What is the credit spread on AAA rated corporate bonds?
What is the credit spread on B rated corporate bonds?
How does the credit spread change with the bond rating? Why?