QUESTION 1 ABC Inc. issued 10-years bonds paying 6% coupons semi-annually. What

Question

QUESTION 1

ABC Inc. issued 10-years bonds paying 6% coupons semi-annually. What should be the price of the bond if the market demands a 10% yield to maturity?  Show equation and work.

a. $827.08

b. $828.81

c. $802.07

d. $803.64

f. $750.76

QUESTION 2

A 10-year bond paying 10% coupon semi-annually is selling for $1000. What is the yield demanded by investors? Show equation and work.

a. 12%

b. 6%

c. 11%

d. 5.50%

e. 10%

QUESTION 3

If the expected inflation rate is 6% and the real rate is 3%, what should be the nominal rate of a risk-free government bond? Show equation and work.

a. 8.12%

b. 9.18%

c. 9.14%

d. 10.21%

e. 8.07%

a. $827.08

b. $828.81

c. $802.07

d. $803.64

f. $750.76

Explanation / Answer

Question 1

Market value of bond = Present value of coupon payments + Present value of face value of bond

Semi-annual coupon payment = $1,000 * 6% * ½ = $30

Maturity of bond = 10 years

Number of semi-annual coupon payments = n = 10 years * 2 = 20

Semi-annual yield to maturity = r = 10%/2 = 5% = 0.05

Present value of annuity = Annuity amount*{1-(1+r)-n}/r

Present value of semi-annual coupon payments = $30 * (1-1.05-20)/0.05 = $373.87

Present value of face value of bond = $1000/1.0520 = $376.89

Market value of bond = $373.87 + $376.89 = $750.76

Hence, correct answer is f. $750.76

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