1- A 10-year bond is issued with a face value of $1,000, paying interest of $60 a year. If the yield to maturity increases shortly after the bond is issued, what happens to the bond's
Points)
Price? (0.75 Points)
N
1
2
3
4
5
6
7
8
9
10
CF
$60.00
$60.00
$60.00
$60.00
$60.00
$60.00
$60.00
$60.00
$60.00 $1,060.00
n
Fv
PMT/ CF
Pv
Cr
YTM
Price
Coupon rate? (0.75
10
$1,000.00
$60.00
-$1,000.00
6.00%
6%
0.07
($1,000.00) ($929.76)
When the yield to maturity increase shortly after the bonds is issued;
Coupon rate: won't change because it's not a factor in it, Coupon rate= CF/FV
Price: will decrease so it will be ($929.76)
2-On February 2023, the Treasury offered a semiannually compounded 19-year bond with a coupon rate of 6% and a yield to maturity of 3.20% (both annual rates). Recognizing that coupons are paid semiannually, Calculate the bond's price as of February 2023. (2 Points)
-Calculate the bond’s price as of February 2028 after ten coupon payments have already been made. (Assume everything else stays the same). (2 Points)
n
PMT/ CF
1
$30.00
After 38 Payments
$1,000.00
6
19
payments
38
CR Annually
6%
CR semi-annually
3%
YTM
3.20%
YTM semi
1.60%
PMT/ CF
$30.00
PV/Price
($1,396.32)
Fv
2
$30.00
3
$30.00
4
$30.00
5
$30.00
After 10 Payments
Payments
28
price
($1,313.97)
6
$30.00
18
$30.00
$30.000
$30.000
7
$30.00
19
$30.00
$31.000
$30.000
8
$30.00
20
$30.00
$32.000
$30.000
9
$30.00
21
$30.00
$33.000
$30.000
10
$30.00
22
$30.00
$34.000
$30.000
11
$30.00
23
$30.00
$35.000
$30.000
12
$30.00
24
$30.00
$36.000
$30.000
13
14
$30.00
$30.00
25
26
$30.00
$30.00
$37.000
$38.000
$30.000 $1,030.000
15
$30.00
27
$30.00
16
$30.00
28
$30.00
3-Suppose that the following zero-coupon bonds are selling at the prices shown below per $100 face value. Determine the corresponding yield to maturity for each bond. (4 Points)
Maturity
1
2
3
4
Price
$ (97.45) $ (94.01) $ (92.18) $
(89.47)
YTM semi
2.617%
3.137%
2.751%
2.821%
FV
$ 100.00
4-You buy a 10-year bond with an annual coupon rate of 10% that pays coupons once a year with a face value of $1000. The current yield-to maturity is 6.5% annually. If the bond’s
yield to maturity decreases by 1%, by what percentage will the price of the bond change? (2 Points) If the bond’s yield to maturity increases by 2%, by what percentage will the price
of the bond change? (2 Points)
n
CR
FV
YTM
PMT/ CF
Price
10
10%
$ 1,000.00
6.50%
$ 100.00
($1,251.61)
If the YTM decreased by 1%
YTM
5.50%
price
($1,339.19)
the changing percentage in the price of the bonds
there is an increase in the prices by 6.54%
If the YTM increased by 2%
YTM
8.50%
price
($1,098.42)
the changing percentage in the price of the bonds
the price decreased by 13.95%
6.54%
-13.95%
5-What is the difference between investment-grade and speculative bonds? If you received $100,000 that you had to invest in bonds, which would you prefer to invest in, and why? (1.5 Points)
Speculative bonds have high risk and low credit so there's no certinity about the investment on the other hand Investment grade bonds are corporate and government debt that bond rating agencies judge as
very likely to be paid back, with interest.
If I have $100,000 I would go to the investment grade bonds 6because it's low risk however it's low profit (a bird in hand is better than 10 on a tree)
17
$30.00
29
$30.00