Practice Quiz 3: Bonds
1. This question has two parts.
a. What is the price of a 20-year, zero-coupon bond with a 5.1% yield
and $1,000 face value?
By hand: PV =
$1000
(1 + 0.051)
20
= $369.78
On the HP-12C:
n = 20
i = 5.1
PMT = 0
FV = 1000
So PV = -369.78
b. Take the above bond and add annual 4.8% coupons. What is the
price of this new bond?
By hand: PV =
$48 ⎛ ⎛
1
⎞
⎜⎜1 − ⎜
⎟
0.051 ⎝ ⎝ 1 + 0.051 ⎠
20
⎞
$1000
= $962.93
⎟⎟ +
20
1
0.051
+
(
)
⎠
On the HP-12C:
n = 20
i = 5.1
PMT = 48
FV = 1000
So PV = -962.93
2. What is the price of a 3-year, U.S. corporate bond with 3.4% coupon, a 3.6%
yield, and a $1,000 face value? Remember that corporate bonds, just like
Treasury bonds, pay semi-annual coupons.
$17 ⎛ ⎛
1
⎞
By hand: PV =
⎜⎜ 1 − ⎜
⎟
0.018 ⎝ ⎝ 1 + 0.018 ⎠
6
⎞
$1000
= $994.36
⎟⎟ +
6
1
+
0.018
(
)
⎠
On the HP-12C:
Foster MBA – Finance Jump Start – Thomas Gilbert
n = 2*3 = 6
i = 3.6/2 = 1.8
PMT = 34/2 = 17
FV = 1000
So PV = -994.36
3. This question has two parts.
a. What is the price of a 3-year Eurobond with 5% annual coupons, a
face value of $1,000, and the following spot rates: r1 = 4.5%, r2 =
5.5%, and r3 = 6%?
You have to solve this by hand:
$50
$50
$1050
PV =
+
+
= $974.37
2
1 + 0.045 (1 + 0.055 ) (1 + 0.06 )3
b. What is the yield-to-maturity of the above bond?
You have to solve this using the HP-12C:
n=3
PV = -974.37
PMT = 50
FV = 1000
So i = 5.96%
Foster MBA – Finance Jump Start – Thomas Gilbert