1.
Money and Banking
Name:
Homework #2
Due Tuesday, February 2th by 5:00 PM
A coupon bond has a face value of $10,000, in one year it makes a coupon payment of $500, in
two years it makes a coupon payment of $500 and its yield to maturity is 8%.
a. What is the coupon rate on this bond?
b. Write the expression to compute the present value of its face value in two years. Compute its
value.
c. Write the expression to compute the present value of the coupon payment to be paid in one
year. Compute its value.
d. Write the expression to compute the present value of the coupon payment in two years.
Compute its value.
e. Add the three present values of future payments from the bond issuer to find the price of this
bond.
2.
Now suppose everything else is the same, but the yield to maturity falls to 4%.
a. Write the expression for the sum of the present values of the future payments from the bond
issuer. Compute the present value to find the price of the bond.
b. Which is greater, the yield to maturity or the coupon rate?
c. Which is greater, the price of the bond or its face value?
3.
Now suppose that the bond has a 4% yield and you buy it. In one year you receive your first
coupon payment and the yield on the bond has risen to 9%.
d. Given that the bond now has one year left to maturity and one coupon payment left and the
yield is 9%, write the expression for the present value of the remaining future payments on the
bond. Compute this present value to find the bond’s current price.
e. Write the expression for the return on the bond over the first year you held it. Compute this
value.