Fixed Income Homework

In: Business and Management

Submitted By yzhang39
Words 1493
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FINE 7650 Fall 2015
Homework 1
Chapters 1-3

Directions: Homework 1 is to be done in your groups. Please submit this homework to the gmail account that is consistent with your section. In order to receive full credit, you must show all work. If you use a financial calculator, please remember to show all of the calculations that you use.
Time Value of Money and Bond Basics 1. ABC Corp bonds have four years to maturity and yield 7%. The bond pays a coupon rate of 5.8%. What happens to the price of the bond one year from today if yields (i) remain same, and (ii) drop to 6.2%?
(i) P=1000, N=3, PMT= 58, I/Y =7, pv =968.51
(ii) p=1000,n=3,pmt=58,i/y= 6.2, pv =989.35

2. If a bond’s yield to maturity is less than its coupon rate and the market rate remains constant, the price of the bond will ____A___ over time
a. fall
b. rise
c. could fall or rise
d. remain the same
e. None of the above

3. If a coupon bond’s yield to maturity is greater than its coupon rate, the bond A
a. will sell at a discount to par value.
b. will sell at a premium to par value.
c. may sell for more or less than par value depending on current market rates.
d. is referred to as a “junk bond.”
e. None of the above.

4. Which of the following statements is most correct? B
a. A zero coupon bond is a promise to pay coupons semi-annually at the market rate of interest in the future.
b. The price of a bond moves in the opposite direction to changes in market interest rates.
c. If a semi-annual coupon bond and an annual coupon bond have identical coupon rates, maturities, and yields to maturity, the two bonds will always sell for the same price.
d. (a) and (b) are correct.
e. (a), (b) and (c) are correct. 5. Which of the following statements is correct? D a. If market rates do not change, the price of a bond selling at a premium increases over time…...

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