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...