Aston University
Aya Ghalayini
BFM120
Week 1 Questions – Time Value of Money
1. You are financial advisor for a friend who addresses the following issues:
a) A company issues £10m face value of five-year zero-coupon bonds when
the interest rate is 6%. What is the initial price of the bond?
b) A coupon bond of £100 pays annual coupons of 5% at the end of years 1, 2
and 3 (when it also matures). If the discount rate is 8%, what is its price
today?
c) A coupon bond of £100 pays annual coupons of 5% at the end of years 1
and 2 (when it also matures). If it trades today at £93.01, what is its yield to
maturity?
2. You are considering investing in three bonds with varying terms and yields
to maturity. Each bond has a coupon of 6%, a par value of £100 and the next
interest payment is due in one year:
Maturity
YTM
2 years
6.5%
10 years
7.2%
20 years
7.7%
a) Calculate the market price of each bond. The present value of a £1 annuity
over ten years discounted at 7.2% is 6.9591; the present value of a £1 annuity
over 20 years discounted at 7.7% is 10.041.
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b) Calculate the market price assuming that all YTMs rise by 200 basis points.
Use annuity present value factors of 6.3615 and 8.6908.
c) Calculate the market price assuming that all YTMs fall by 200 basis points.
Use annuity present value factors of 7.6473 and 11.7546.
d) Which bond is the most volatile? Why?
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