- Submitted By: keagandave
- Date Submitted: 08/17/2014 7:30 PM
- Category: Business
- Words: 252
- Page: 2

5-1 Bond Valuation with Annual Payments

Using Financial calculator

Compounding Annually

N = 12; I/Y = 9%; Payment = -80 (8% * 1000); PV = 0; FV = -1000

CPT PV = 928.39

5-2 YTM for Annual Payments

Using Financial calculator

Compounding Annually

N = 12; I/Y = 0; Payment = 100 (10% * 1000); PV = -850; FV = 1000

CPT I/Y = 12.4751

5-6 Maturity Risk Premium

R* =3% Risk free rate

IP = 3% Inflation rate

Rt-2 = (2 year Treasury bill yield)

MRP 2= (Maturity Rate Premium for 2 years)

Rt-2 = r* + IP + Mrp2

6.3%=3% + 3% + Mrp2

6.3%- 3%-3%= Mrp2

0.3% = Mrp2

Mrp2 = 0.3%

5-7 Bond Valuation with Semi-Annual Payments

Using Financial calculator

Compounding Semi-Annually

N = 16 (8 * 2); I/Y = 4.25 (8.5/2); PMT = -50 (10% * 1000 = 100/2); FV = -1000;

CPT PV = 1,085.8023

5-8 Bond Valuation and Interest Rate Risk

Using Financial calculator

Compounding Semi-Annually

N = 20 (10 * 2); I/Y = 0; PMT = 40 (8% * 1000 = 80 / 2); PV = -1100; FV = 1000;

CPT I/Y = 3.3085

YTM = 6.6170 (3.3085 * 2)

N = 10 (5 * 2); PV = -1100; PMT = 40 (8% * 1000 = 80 / 2); FV = 1050; I/Y = 0;

CPT I/Y = 3.2443

YTC = 6.4886 (3.2443 * 2)

5-9 Bond Valuation and Interest Rate Risk

a) The value of each bonds using financial calculator:

1) Bond L @ 5%: N = 15; I/Y = 5; PMT = -100; FV = -1000; PV = 0;

CPT PV = 1518.9829

Bond S @ 5%: N = 1; I/Y = 5; PMT = -100; FV = -1000; PV = 0

CPT PV = 1047.6190

2) Bond L @ 8%: N = 15; I/Y = 8; PMT = -100; FV = -1000; PV = 0;

CPT PV = 1171.1896

Bond S @ 8%: N = 1; I/Y = 8; PMT = -100; FV = -1000; PV = 0

CPT PV = 1018.5185

3) Bond L @ 12%: N = 15; I/Y = 12; PMT = -100; FV = -1000; PV = 0;

CPT PV = 863.7827

Bond S @ 12%: N = 1; I/Y = 12; PMT = -100; FV = -1000; PV = 0

CPT PV = 982.1429

b) Short-term bond prices are less sensitive than long-term bond prices to interest rate changes because funds invested in short-term bonds can be reinvested at the new interest rate sooner than funds tied up in...