# Fixed Income: Practice Problems with Solutions

Size: px
Start display at page:

Transcription

1 Fixed Income: Practice Problems with Solutions Directions: Unless otherwise stated, assume semi-annual payment on bonds.. A 6.0 percent bond matures in exactly 8 years and has a par value of 000 dollars. The bond sells for 338. dollars. What is the semiannual coupon payment? a b c d e a. semiannual coupon: C A 9.0 percent bond matures in exactly 5 years and has a par value of 7000 dollars. The bond sells for 673. dollars. What is the current yield? a. 9.0 b c d e a. current yield: CY A 9. 5 percent bond matures in exactly 6 years and has a par value of 0000 dollars. The bond sells for 40.0 dollars. What is the yield to maturity? a b. 4.0 c d e. 5.0 a. calculator inputs: N 3;PV 40.0;PMT ;FV 0000 b. cpt I/Y. 75 c. so y 5. 5

2 4. A 4. 5 percent bond with a par value of 000 dollars matures in 7 years, 70 days. The next coupon is paid in 70 days. What is the accrued interest? Assume 83 days between coupon payment dates. a b c d e a. days since last coupon b. half-year since last coupon c. so accrued interest A 7. 5 percent bond with a par value of 000 dollars matures in 5 years, 0 days. The next coupon is paid in 0 days. The yield is 4. 5 percent. What is the dirty price? Assume 83 days between coupon payment dates. a. 36. b c d e a. solve for value of bond V w at first coupon payment date:w 0 days half years b. calculator inputs: N 30;I/Y ;PMT ;FV 000 c. cpt PV d. so V A 9.0 percent bond with a par value of 000 dollars matures in 9 years, 9 days. The next coupon is paid in 9 days. The bond sells for 378. dollars. What is the clean price? Assume 83 days between coupon payment dates. a b c d e a. days since last coupon

3 b. half-year since last coupon c. so accrued interest d. then clean price is given by: CP A zero-coupon bond with a par value of 000 dollars matures in 0 years, 59 days. If the bond yields 4. 5 percent, what is the clean price? Assume 83 days in a half-year. a b c d e a. time to maturity b. clean (or dirty) price A zero-coupon bond with a par value of 000 dollars matures in 0 years, 56 days. If the bond sells for , what is yield to maturity? Assume 83 days in a half-year. a. 7.0 b. 8.0 c d e. 9.0 a. time to maturity:t b. yieldtomaturity The yields on a six month and one year zero-coupon bonds are 4.0 and 9.0 percent, respectively. A dealer holds in inventory a 5.0 percent treasury note with a par value of 000 dollars and maturity of one year. What is the minimum price the dealer should ask for the bond? a b c d e a. minimum price is the cost of constructing cash flow pattern using zero-coupon bonds: 5.0d 05.0d

4 b. so: P A 7. 5 percent par treasury bond matures in exactly 3 years. A 5.0 percent par municipal bond matures in exactly 3 years. Suppose both bonds have the same default risk. At what marginal tax rate would the two bonds have the same after-tax yield? a b c d e a. since both bonds are selling at par: y treasury 7. 5 and y muni 5.0 b. therefore: c. which implies: d. so: A 0.0 percent par municipal bond matures in exactly 3 years. For an investor at the 9.0 percent marginal tax rate, what is the taxable-equivalent yield? a. 7. b c d e a. since the muni is selling at par: y muni 0.0 b. therefore: TEY y muni A 3.0 percent TIP bond matures in exactly 4 years. Six months ago the par value was 0800 dollars. The annualized CPI (inflation rate) over the last six months equals Assuming a coupon is paid today, what is par value of the bond? a. 86. b c. 33. d. 4. e a. inflation adjusted principal: M A 4.0 percent TIP bond matures in exactly years. Six months ago the par value was 0500 dollars. The annualized CPI (inflation rate) over the last six months equals. 5.

5 Assume the coupon is paid today. What is the dollar value of the coupon paid today? a b c.. 63 d e. 0.0 a. inflation adjusted principal: M b. apply coupon rate to inflation adjusted principal: c A 3. 5 percent TIP bond matures in exactly 4 years. Six months ago the par value was 0600 dollars. The annualized CPI (inflation rate) compounded semiannually over the last six months equals 4. 5 percent. Assume the coupon is paid today. Six months ago the bond was selling at par and today the bond is selling at 5.0 percent premium over par. What is the annual rate of return compounded semiannually over the last six months? a b c d e a. inflation adjusted principal: M b. apply coupon rate to inflation adjusted principal: c c. one plus the return over a half year equals the ratio of the begining to end of half-year value d. value at the end of the first half year equals the semi-annual coupon: plus the price: P e. so: R f. finally: R percent 5. A 8.0 percent bond matures in exactly 0 years and has a par value of 0000 dollars. The bond sells for dollars. For a 50 basis increase in the yield, determine the percentage change in the bond s price? a b c d e a. first step, find yield to maturity y

6 b. calculator inputs: N 0;PV 090.0;PMT ;FV 0000 c. cpt I/Y 3. 5 d. so y 6. 5 e. second step, increase yield by 50 bps f. new yield g. so I/Y 3. 5 h. third step, compute price at new yield i. calculator inputs: N 0;I/Y 3. 5;PMT ;FV 0000 j. cpt PV k. Δ%P A 8. 5 percent bond matures in exactly 3 years and has a par value of 7000 dollars. The bond sells for dollars. What is the approximate (effective) duration for a 0 basis point shock (either up or down)? a b c d e a. first step, find yield to maturity y b. calculator inputs: N 6;PV 93. 4;PMT c. cpt I/Y. 5 d. so y 5.0 e. second step, increase yield by 0 bps f. new yield g. so I/Y. 6 h. third step, compute price at new yield y i. calculator inputs: N 6;I/Y. 6;PMT j. so: P 963. k. fourth step, decrease yield by 0 bps l. new yield m. so I/Y. 4 n. fourth step, compute price at new yield y o. calculator inputs: N 6;I/Y. 4;PMT p. so P q. fifth step, determine effective duration ;FV ;FV ;FV 7000

7 r. definition: ED P 0 slope s. formula: ED P P P 0 Δy A T-bill matures in exactly 4 days and has a par value of 0000 dollars. The bond sells for 978 dollars. What is the discount yield? a b c d e a. definition: annualized discount based upon 360 day year b. so DY A T-bill matures in exactly 36 days and has a par value of 0000 dollars. The discount yield equals What is the price? a b c d e a. definition: annualized discount based upon 360 day year b. true discount as percent c. so price: P A 7.0 percent bond matures in exactly 3 years and has a par value of 000 dollars. The bond sells for 4. 4 dollars. The bond is callable in 7 years for 990 dollars. What is the yield to call? a. 4.0 b. 5.0 c d e. 6.0 a. calculate the yield to maturity assuming the bond is called at the first call date b. calculator inputs: N 4;PV 4. 4;PMT ;FV 990 c. cpt I/Y. 5 d. so y 4. 5

8 0. A 4.0 percent bond with a par value of 000 dollars matures in 3 years. The bond sells for dollars. Assume coupons are reinvested at 7. 5 percent per year compounded semiannually. What is the total return (over holding period of T years) compounded semiannually on the bond? a b c d e a. first step, compute future value of coupons to maturity date b. calculator inputs: N 6;PV 0;I/Y ;PMT c. cpt FV d. second step add in maturity value: FV e. third step, find return compounded semiannually that converts price into f. total return: TR A floating rate bond has a quoted margin of 0.5 percent, a par value of 0000 dollars, and maturity of.0 years. The bond sells for dollars. The initial reference rate is 7. 5 percent per year compounded semiannually. The coupon rate is reset every six months. What is the discount margin in basis points? a. 5 b. 0 c. 0 d. 5 e. 0 a. first step, project cash flows under the assumption that future reference rate equals the current reference rate b. coupon rate: CR c. coupon: C d. second step, compute yield to maturity e. calculator inputs: N 4.0;PV 0073.;PMT 400.0;FV 0000 f. cpt I/Y 3. 8 g. so y 7. 6 h. third step, discount margin is difference between computed yield and reference rate i. discount margin:

9 . The yields on a six month, one year, and one and a half year zero-coupon bonds are 9. 5, 5. 5, and 6. 5 percent, respectively. What is the forward price of a contract to accept delivery of a six month T-bill with a par value of 0000 dollars in one year? a. 0. b c d e a. method: cost of carry model b. forward price should equal the cost of buying the spot asset and holding it to the delivery date of one year c. first step, value spot asset d. spot asset is zero a coupon bond that has same maturity date (not time to maturity) as bond underlying forward contract e. value of spot asset: P f. second step, carry spot asset forward at spot rate to delivery date g. forward price: F The yields on a six month, one year, and one and a half year zero-coupon bonds are 5. 5, 9. 5, and 8.0 percent, respectively. What is the forward price of a contract to accept delivery of a one year T-bill with a par value of 0000 dollars in six months? a b c d e. 05. a. method: cost of carry model b. forward price should equal the cost of buying the spot asset and holding it to the delivery date of six months c. first step, value spot asset d. spot asset is zero a coupon bond that has same maturity date (not time to maturity) as bond underlying forward contract e. value of spot asset: P f. second step, carry spot asset forward at spot rate to delivery date g. forward price: F The yields on a six month, one year, and one and a half year zero-coupon bonds are 6.0,

10 6. 5, and 9.0 percent, respectively. What is the forward rate on a contract to accept delivery of a one year T-bill in six months? a b c d e a. method: () construct forward contract by borrowing short term (to delivery date) and investing long term (to maturity date) and () compute yield on the constructed forward contract V b. formula: f a,b b / b a V a c. forward rate (each half year): f,3 d. so over year the forward rate is / The yields on a six month, one year, and one and a half year zero-coupon bonds are 5. 5, 4.0, and 4. 5 percent, respectively. What is the forward rate on a contract to accept delivery of a six month T-bill in one year? a b c d e a. method: () construct forward contract by borrowing short term (to delivery date) and investing long term (to maturity date) and () compute yield on the constructed forward contract V b. formula: f a,b b / b a V a c. forward rate (each half year): f, d. so over year the forward rate is The price of a six month zero-coupon bond is The price of a one-year 4. 5 percent coupon bond is Both bonds has a par value of 00 dollars. What are the spot rates? a , b , 5. 9 c. 8.0, 6.0 d. 8., e. 8. 5, 6.

11 a. used boot-strap method to find yield on a one-year zero coupon b. price of dollar in six months: d / c. price of coupon bond: d 0. 5d d. substitute for d : d e. solve for d : d f. convert d and d into spot rates g. z d h. z d A 6.0 percent par treasury bond with a par value of 00 dollars matures in exactly one and a half years. The bond sells for What is the Macaully duration? a b c d e a. first step, compute yield to maturity b. calculator inputs: N 3;PV ;PMT ;FV 00 c. cpt I/Y 3. 5 d. so y 7.0 e. second step, compute the duration f. formula: D N C t t, where cash flow are distributed semiannually. P t y/ g. so: D A barbell promises 87 dollars in 3. 5 years and 00 dollars in 0.0. The term structure is a 4.0 percent for all maturities. What is the Macaully duration of the barbell? a b c d e a. first step, compute price of first cash flow b. PV c. second step, compute price of second cash flow d. PV

12 e. third step, determine price of barbell f. P g. fourth step, compute duration h. D A 9. 5 percent treasury bond has a yield to maturity of 4.0 and a duration of. 5 years. If the yield changes by 93 basis points, what is your best estimate of the percentage change in the bond s price. a b c d e a. formula: Δ%P D Δy y/ b. so: Δ%P A 8. 5 percent treasury bond has a yield to maturity of 5.0, a duration of 5.0 years, and a convexity of If the yield changes by 37 basis points, what is your best estimate of the percentage change in the bond s price. a b c d e a. formula: Δ%P D Δy y/ CX Δy b. so: Δ%P

### Chapter 8. Step 2: Find prices of the bonds today: n i PV FV PMT Result Coupon = 4% 29.5 5? 100 4 84.74 Zero coupon 29.5 5? 100 0 23.

Chapter 8 Bond Valuation with a Flat Term Structure 1. Suppose you want to know the price of a 10-year 7% coupon Treasury bond that pays interest annually. a. You have been told that the yield to maturity

### A) 1.8% B) 1.9% C) 2.0% D) 2.1% E) 2.2%

1 Exam FM Questions Practice Exam 1 1. Consider the following yield curve: Year Spot Rate 1 5.5% 2 5.0% 3 5.0% 4 4.5% 5 4.0% Find the four year forward rate. A) 1.8% B) 1.9% C) 2.0% D) 2.1% E) 2.2% 2.

### CHAPTER 14: BOND PRICES AND YIELDS

CHAPTER 14: BOND PRICES AND YIELDS PROBLEM SETS 1. The bond callable at 105 should sell at a lower price because the call provision is more valuable to the firm. Therefore, its yield to maturity should

### Practice Questions for Midterm II

Finance 333 Investments Practice Questions for Midterm II Winter 2004 Professor Yan 1. The market portfolio has a beta of a. 0. *b. 1. c. -1. d. 0.5. By definition, the beta of the market portfolio is

### CHAPTER 14: BOND PRICES AND YIELDS

CHAPTER 14: BOND PRICES AND YIELDS 1. a. Effective annual rate on 3-month T-bill: ( 100,000 97,645 )4 1 = 1.02412 4 1 =.10 or 10% b. Effective annual interest rate on coupon bond paying 5% semiannually:

### Exam 1 Morning Session

91. A high yield bond fund states that through active management, the fund s return has outperformed an index of Treasury securities by 4% on average over the past five years. As a performance benchmark

### Analysis of Deterministic Cash Flows and the Term Structure of Interest Rates

Analysis of Deterministic Cash Flows and the Term Structure of Interest Rates Cash Flow Financial transactions and investment opportunities are described by cash flows they generate. Cash flow: payment

### 2. Determine the appropriate discount rate based on the risk of the security

Fixed Income Instruments III Intro to the Valuation of Debt Securities LOS 64.a Explain the steps in the bond valuation process 1. Estimate the cash flows coupons and return of principal 2. Determine the

### LOS 56.a: Explain steps in the bond valuation process.

The following is a review of the Analysis of Fixed Income Investments principles designed to address the learning outcome statements set forth by CFA Institute. This topic is also covered in: Introduction

### Practice Set #2 and Solutions.

FIN-672 Securities Analysis & Portfolio Management Professor Michel A. Robe Practice Set #2 and Solutions. What to do with this practice set? To help MBA students prepare for the assignment and the exams,

### Chapter 5: Valuing Bonds

FIN 302 Class Notes Chapter 5: Valuing Bonds What is a bond? A long-term debt instrument A contract where a borrower agrees to make interest and principal payments on specific dates Corporate Bond Quotations

### CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES

CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES 1. Expectations hypothesis. The yields on long-term bonds are geometric averages of present and expected future short rates. An upward sloping curve is

### VALUATION OF DEBT CONTRACTS AND THEIR PRICE VOLATILITY CHARACTERISTICS QUESTIONS See answers below

VALUATION OF DEBT CONTRACTS AND THEIR PRICE VOLATILITY CHARACTERISTICS QUESTIONS See answers below 1. Determine the value of the following risk-free debt instrument, which promises to make the respective

### ANALYSIS OF FIXED INCOME SECURITIES

ANALYSIS OF FIXED INCOME SECURITIES Valuation of Fixed Income Securities Page 1 VALUATION Valuation is the process of determining the fair value of a financial asset. The fair value of an asset is its

### Bond Price Arithmetic

1 Bond Price Arithmetic The purpose of this chapter is: To review the basics of the time value of money. This involves reviewing discounting guaranteed future cash flows at annual, semiannual and continuously

### Chapter 3 Fixed Income Securities

Chapter 3 Fixed Income Securities Road Map Part A Introduction to finance. Part B Valuation of assets, given discount rates. Fixed-income securities. Stocks. Real assets (capital budgeting). Part C Determination

### CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES

Chapter - The Term Structure of Interest Rates CHAPTER : THE TERM STRUCTURE OF INTEREST RATES PROBLEM SETS.. In general, the forward rate can be viewed as the sum of the market s expectation of the future

### CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES

CHAPTER : THE TERM STRUCTURE OF INTEREST RATES CHAPTER : THE TERM STRUCTURE OF INTEREST RATES PROBLEM SETS.. In general, the forward rate can be viewed as the sum of the market s expectation of the future

### Chapter 4 Valuing Bonds

Chapter 4 Valuing Bonds MULTIPLE CHOICE 1. A 15 year, 8%, \$1000 face value bond is currently trading at \$958. The yield to maturity of this bond must be a. less than 8%. b. equal to 8%. c. greater than

### Chapter 11. Bond Pricing - 1. Bond Valuation: Part I. Several Assumptions: To simplify the analysis, we make the following assumptions.

Bond Pricing - 1 Chapter 11 Several Assumptions: To simplify the analysis, we make the following assumptions. 1. The coupon payments are made every six months. 2. The next coupon payment for the bond is

Chapter Bond Prices and Yields McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Bond Prices and Yields Our goal in this chapter is to understand the relationship

### Interest Rates and Bond Valuation

Interest Rates and Bond Valuation Chapter 6 Key Concepts and Skills Know the important bond features and bond types Understand bond values and why they fluctuate Understand bond ratings and what they mean

### Chapter 9 Bonds and Their Valuation ANSWERS TO SELECTED END-OF-CHAPTER QUESTIONS

Chapter 9 Bonds and Their Valuation ANSWERS TO SELECTED END-OF-CHAPTER QUESTIONS 9-1 a. A bond is a promissory note issued by a business or a governmental unit. Treasury bonds, sometimes referred to as

### Bonds and Yield to Maturity

Bonds and Yield to Maturity Bonds A bond is a debt instrument requiring the issuer to repay to the lender/investor the amount borrowed (par or face value) plus interest over a specified period of time.

### ACI THE FINANCIAL MARKETS ASSOCIATION

ACI THE FINANCIAL MARKETS ASSOCIATION EXAMINATION FORMULAE 2009 VERSION page number INTEREST RATE..2 MONEY MARKET..... 3 FORWARD-FORWARDS & FORWARD RATE AGREEMENTS..4 FIXED INCOME.....5 FOREIGN EXCHANGE

### TIME VALUE OF MONEY #6: TREASURY BOND. Professor Peter Harris Mathematics by Dr. Sharon Petrushka. Introduction

TIME VALUE OF MONEY #6: TREASURY BOND Professor Peter Harris Mathematics by Dr. Sharon Petrushka Introduction This problem assumes that you have mastered problems 1-5, which are prerequisites. In this

### American Options and Callable Bonds

American Options and Callable Bonds American Options Valuing an American Call on a Coupon Bond Valuing a Callable Bond Concepts and Buzzwords Interest Rate Sensitivity of a Callable Bond exercise policy

### Problem Set: Annuities and Perpetuities (Solutions Below)

Problem Set: Annuities and Perpetuities (Solutions Below) 1. If you plan to save \$300 annually for 10 years and the discount rate is 15%, what is the future value? 2. If you want to buy a boat in 6 years

### FNCE 301, Financial Management H Guy Williams, 2006

REVIEW We ve used the DCF method to find present value. We also know shortcut methods to solve these problems such as perpetuity present value = C/r. These tools allow us to value any cash flow including

### Chapter 6 APPENDIX B. The Yield Curve and the Law of One Price. Valuing a Coupon Bond with Zero-Coupon Prices

196 Part Interest Rates and Valuing Cash Flows Chapter 6 APPENDIX B The Yield Curve and the Law of One Price Thus far, we have focused on the relationship between the price of an individual bond and its

### Chapter 6 Valuing Bonds. (1) coupon payment - interest payment (coupon rate * principal) - usually paid every 6 months.

Chapter 6 Valuing Bonds Bond Valuation - value the cash flows (1) coupon payment - interest payment (coupon rate * principal) - usually paid every 6 months. (2) maturity value = principal or par value

### You just paid \$350,000 for a policy that will pay you and your heirs \$12,000 a year forever. What rate of return are you earning on this policy?

1 You estimate that you will have \$24,500 in student loans by the time you graduate. The interest rate is 6.5%. If you want to have this debt paid in full within five years, how much must you pay each

### TIME VALUE OF MONEY PROBLEM #5: ZERO COUPON BOND

TIME VALUE OF MONEY PROBLEM #5: ZERO COUPON BOND Professor Peter Harris Mathematics by Dr. Sharon Petrushka Introduction This assignment will focus on using the TI - 83 to calculate the price of a Zero

### Solutions 2. 1. For the benchmark maturity sectors in the United States Treasury bill markets,

FIN 472 Professor Robert Hauswald Fixed-Income Securities Kogod School of Business, AU Solutions 2 1. For the benchmark maturity sectors in the United States Treasury bill markets, Bloomberg reported the

### Asset Valuation Debt Investments: Analysis and Valuation

Asset Valuation Debt Investments: Analysis and Valuation Joel M. Shulman, Ph.D, CFA Study Session # 15 Level I CFA CANDIDATE READINGS: Fixed Income Analysis for the Chartered Financial Analyst Program:

### Topics in Chapter. Key features of bonds Bond valuation Measuring yield Assessing risk

Bond Valuation 1 Topics in Chapter Key features of bonds Bond valuation Measuring yield Assessing risk 2 Determinants of Intrinsic Value: The Cost of Debt Net operating profit after taxes Free cash flow

### Bond Market Overview and Bond Pricing

Bond Market Overview and Bond Pricing. Overview of Bond Market 2. Basics of Bond Pricing 3. Complications 4. Pricing Floater and Inverse Floater 5. Pricing Quotes and Accrued Interest What is A Bond? Bond:

### Bond Valuation. Chapter 7. Example (coupon rate = r d ) Bonds, Bond Valuation, and Interest Rates. Valuing the cash flows

Bond Valuation Chapter 7 Bonds, Bond Valuation, and Interest Rates Valuing the cash flows (1) coupon payment (interest payment) = (coupon rate * principal) usually paid every 6 months (2) maturity value

### CHAPTER 8 INTEREST RATES AND BOND VALUATION

CHAPTER 8 INTEREST RATES AND BOND VALUATION Answers to Concept Questions 1. No. As interest rates fluctuate, the value of a Treasury security will fluctuate. Long-term Treasury securities have substantial

Answers to Review Questions 1. The real rate of interest is the rate that creates an equilibrium between the supply of savings and demand for investment funds. The nominal rate of interest is the actual

### Financial-Institutions Management. Solutions 1. 6. A financial institution has the following market value balance sheet structure:

FIN 683 Professor Robert Hauswald Financial-Institutions Management Kogod School of Business, AU Solutions 1 Chapter 7: Bank Risks - Interest Rate Risks 6. A financial institution has the following market

### Manual for SOA Exam FM/CAS Exam 2.

Manual for SOA Exam FM/CAS Exam 2. Chapter 5. Bonds. c 2009. Miguel A. Arcones. All rights reserved. Extract from: Arcones Manual for the SOA Exam FM/CAS Exam 2, Financial Mathematics. Fall 2009 Edition,

### Bond valuation. Present value of a bond = present value of interest payments + present value of maturity value

Bond valuation A reading prepared by Pamela Peterson Drake O U T L I N E 1. Valuation of long-term debt securities 2. Issues 3. Summary 1. Valuation of long-term debt securities Debt securities are obligations

Chapter Two Determinants of Interest Rates Interest Rate Fundamentals Nominal interest rates - the interest rate actually observed in financial markets directly affect the value (price) of most securities

### Chapter 6 Interest Rates and Bond Valuation

Chapter 6 Interest Rates and Bond Valuation Solutions to Problems P6-1. P6-2. LG 1: Interest Rate Fundamentals: The Real Rate of Return Basic Real rate of return = 5.5% 2.0% = 3.5% LG 1: Real Rate of Interest

### CHAPTER 7: FIXED-INCOME SECURITIES: PRICING AND TRADING

CHAPTER 7: FIXED-INCOME SECURITIES: PRICING AND TRADING Topic One: Bond Pricing Principles 1. Present Value. A. The present-value calculation is used to estimate how much an investor should pay for a bond;

### CHAPTER 10 BOND PRICES AND YIELDS

CHAPTER 10 BOND PRICES AND YIELDS 1. a. Catastrophe bond. Typically issued by an insurance company. They are similar to an insurance policy in that the investor receives coupons and par value, but takes

### Exam 1 Sample Questions

Exam 1 Sample Questions 1. Asset allocation refers to. A. the allocation of the investment portfolio across broad asset classes B. the analysis of the value of securities C. the choice of specific assets

### Bond Valuation. Capital Budgeting and Corporate Objectives

Bond Valuation Capital Budgeting and Corporate Objectives Professor Ron Kaniel Simon School of Business University of Rochester 1 Bond Valuation An Overview Introduction to bonds and bond markets» What

### Bond Valuation. What is a bond?

Lecture: III 1 What is a bond? Bond Valuation When a corporation wishes to borrow money from the public on a long-term basis, it usually does so by issuing or selling debt securities called bonds. A bond

### ECO 4368 Instructor: Saltuk Ozerturk. Bonds and Their Valuation

ECO 4368 Instructor: Saltuk Ozerturk Bonds and Their Valuation A bond is a long term contract under which a borrower (the issuer) agrees to make payments of interest and principal on speci c dates, to

### Bond Valuation. FINANCE 350 Global Financial Management. Professor Alon Brav Fuqua School of Business Duke University. Bond Valuation: An Overview

Bond Valuation FINANCE 350 Global Financial Management Professor Alon Brav Fuqua School of Business Duke University 1 Bond Valuation: An Overview Bond Markets What are they? How big? How important? Valuation

### How To Invest In Stocks And Bonds

Review for Exam 1 Instructions: Please read carefully The exam will have 21 multiple choice questions and 5 work problems. Questions in the multiple choice section will be either concept or calculation

### Coupon Bonds and Zeroes

Coupon Bonds and Zeroes Concepts and Buzzwords Coupon bonds Zero-coupon bonds Bond replication No-arbitrage price relationships Zero rates Zeroes STRIPS Dedication Implied zeroes Semi-annual compounding

### Math of Finance. Texas Association of Counties January 2014

Math of Finance Texas Association of Counties January 2014 Money Market Securities Sample Treasury Bill Quote*: N Bid Ask Ask Yld 126 4.86 4.85 5.00 *(Yields do not reflect current market conditions) Bank

### Mathematics. Rosella Castellano. Rome, University of Tor Vergata

and Loans Mathematics Rome, University of Tor Vergata and Loans Future Value for Simple Interest Present Value for Simple Interest You deposit E. 1,000, called the principal or present value, into a savings

### CHAPTER 8 INTEREST RATES AND BOND VALUATION

CHAPTER 8 INTEREST RATES AND BOND VALUATION Solutions to Questions and Problems 1. The price of a pure discount (zero coupon) bond is the present value of the par value. Remember, even though there are

### Chapter 4: Common Stocks. Chapter 5: Forwards and Futures

15.401 Part B Valuation Chapter 3: Fixed Income Securities Chapter 4: Common Stocks Chapter 5: Forwards and Futures Chapter 6: Options Lecture Notes Introduction 15.401 Part B Valuation We have learned

### In this chapter we will learn about. Treasury Notes and Bonds, Treasury Inflation Protected Securities,

2 Treasury Securities In this chapter we will learn about Treasury Bills, Treasury Notes and Bonds, Strips, Treasury Inflation Protected Securities, and a few other products including Eurodollar deposits.

FIN 534 Week 4 Quiz 3 (Str) Click Here to Buy the Tutorial http://www.tutorialoutlet.com/fin-534/fin-534-week-4-quiz-3- str/ For more course tutorials visit www.tutorialoutlet.com Which of the following

### 550.444 Introduction to Financial Derivatives

550.444 Introduction to Financial Derivatives Week of October 7, 2013 Interest Rate Futures Where we are Last week: Forward & Futures Prices/Value (Chapter 5, OFOD) This week: Interest Rate Futures (Chapter

### Zero-Coupon Bonds (Pure Discount Bonds)

Zero-Coupon Bonds (Pure Discount Bonds) The price of a zero-coupon bond that pays F dollars in n periods is F/(1 + r) n, where r is the interest rate per period. Can meet future obligations without reinvestment

### U.S. Treasury Securities

U.S. Treasury Securities U.S. Treasury Securities 4.6 Nonmarketable To help finance its operations, the U.S. government from time to time borrows money by selling investors a variety of debt securities

Review for Exam 1 Instructions: Please read carefully The exam will have 20 multiple choice questions and 5 work problems. Questions in the multiple choice section will be either concept or calculation

### Duration and convexity

Duration and convexity Prepared by Pamela Peterson Drake, Ph.D., CFA Contents 1. Overview... 1 A. Calculating the yield on a bond... 4 B. The yield curve... 6 C. Option-like features... 8 D. Bond ratings...

### FINANCIAL MATHEMATICS FIXED INCOME

FINANCIAL MATHEMATICS FIXED INCOME 1. Converting from Money Market Basis to Bond Basis and vice versa 2 2. Calculating the Effective Interest Rate (Non-annual Payments)... 4 3. Conversion of Annual into

### How To Calculate Bond Price And Yield To Maturity

CHAPTER 10 Bond Prices and Yields Interest rates go up and bond prices go down. But which bonds go up the most and which go up the least? Interest rates go down and bond prices go up. But which bonds go

### Fixed Income Portfolio Management. Interest rate sensitivity, duration, and convexity

Fixed Income ortfolio Management Interest rate sensitivity, duration, and convexity assive bond portfolio management Active bond portfolio management Interest rate swaps 1 Interest rate sensitivity, duration,

### Fin 3312 Sample Exam 1 Questions

Fin 3312 Sample Exam 1 Questions Here are some representative type questions. This review is intended to give you an idea of the types of questions that may appear on the exam, and how the questions might

### CHAPTER 5. Interest Rates. Chapter Synopsis

CHAPTER 5 Interest Rates Chapter Synopsis 5.1 Interest Rate Quotes and Adjustments Interest rates can compound more than once per year, such as monthly or semiannually. An annual percentage rate (APR)

### C(t) (1 + y) 4. t=1. For the 4 year bond considered above, assume that the price today is 900\$. The yield to maturity will then be the y that solves

Economics 7344, Spring 2013 Bent E. Sørensen INTEREST RATE THEORY We will cover fixed income securities. The major categories of long-term fixed income securities are federal government bonds, corporate

### TVM Applications Chapter

Chapter 6 Time of Money UPS, Walgreens, Costco, American Air, Dreamworks Intel (note 10 page 28) TVM Applications Accounting issue Chapter Notes receivable (long-term receivables) 7 Long-term assets 10

### Alliance Consulting BOND YIELDS & DURATION ANALYSIS. Bond Yields & Duration Analysis Page 1

BOND YIELDS & DURATION ANALYSIS Bond Yields & Duration Analysis Page 1 COMPUTING BOND YIELDS Sources of returns on bond investments The returns from investment in bonds come from the following: 1. Periodic

### Chapter 19. Web Extension: Rights Offerings and Zero Coupon Bonds. Rights Offerings

Chapter 19 Web Extension: Rights Offerings and Zero Coupon Bonds T his Web Extension discusses two additional topics in financial restructuring: rights offerings and zero coupon bonds. Rights Offerings

### Chapter 6. Learning Objectives Principles Used in This Chapter 1. Annuities 2. Perpetuities 3. Complex Cash Flow Streams

Chapter 6 Learning Objectives Principles Used in This Chapter 1. Annuities 2. Perpetuities 3. Complex Cash Flow Streams 1. Distinguish between an ordinary annuity and an annuity due, and calculate present

### FI 302, Business Finance Exam 2, Fall 2000 versions 1 & 8 KEYKEYKEYKEYKEYKEYKEYKEYKEYKEYKEYKEYKEY

FI 302, Business Finance Exam 2, Fall 2000 versions 1 & 8 KEYKEYKEYKEYKEYKEYKEYKEYKEYKEYKEYKEYKEY 1. (3 points) BS16 What is a 401k plan Most U.S. households single largest lifetime source of savings is

### Key Concepts and Skills. Chapter Outline. Basic Definitions. Future Values. Future Values: General Formula 1-1. Chapter 4

Key Concepts and Skills Chapter 4 Introduction to Valuation: The Time Value of Money Be able to compute the future value of an investment made today Be able to compute the present value of cash to be received

Review for Exam 1 Instructions: Please read carefully The exam will have 25 multiple choice questions and 5 work problems covering chapter 1, 2, 3, 4, 14, 16. Questions in the multiple choice section will

### Practice Set #1 and Solutions.

Bo Sjö 14-05-03 Practice Set #1 and Solutions. What to do with this practice set? Practice sets are handed out to help students master the material of the course and prepare for the final exam. These sets

### CHAPTER 20. Hybrid Financing: Preferred Stock, Warrants, and Convertibles

CHAPTER 20 Hybrid Financing: Preferred Stock, Warrants, and Convertibles 1 Topics in Chapter Types of hybrid securities Preferred stock Warrants Convertibles Features and risk Cost of capital to issuers

### CHAPTER 4. The Time Value of Money. Chapter Synopsis

CHAPTER 4 The Time Value of Money Chapter Synopsis Many financial problems require the valuation of cash flows occurring at different times. However, money received in the future is worth less than money

### The explanations below will make it easier for you to use the calculator. The ON/OFF key is used to turn the calculator on and off.

USER GUIDE Texas Instrument BA II Plus Calculator April 2007 GENERAL INFORMATION The Texas Instrument BA II Plus financial calculator was designed to support the many possible applications in the areas

### Finance Homework Julian Vu May 28, 2008

Finance Homework Julian Vu May 28, 2008 Assignment: p. 28-29 Problems 1-1 and 1-2 p. 145-147 Questions 4-2, 4-3, and 4-4, and Problems 4-1, 4-2, 4-3, and 4-13 P1-1 A Treasury Bond that matures in 10 years

### FIN 472 Fixed-Income Securities Forward Rates

FIN 472 Fixed-Income Securities Forward Rates Professor Robert B.H. Hauswald Kogod School of Business, AU Interest-Rate Forwards Review of yield curve analysis Forwards yet another use of yield curve forward

### Chapter 4 Bonds and Their Valuation ANSWERS TO END-OF-CHAPTER QUESTIONS

Chapter 4 Bonds and Their Valuation ANSWERS TO END-OF-CHAPTER QUESTIONS 4-1 a. A bond is a promissory note issued by a business or a governmental unit. Treasury bonds, sometimes referred to as government

### FIXED-INCOME SECURITIES. Chapter 10. Swaps

FIXED-INCOME SECURITIES Chapter 10 Swaps Outline Terminology Convention Quotation Uses of Swaps Pricing of Swaps Non Plain Vanilla Swaps Terminology Definition Agreement between two parties They exchange

### Chapter Nine Selected Solutions

Chapter Nine Selected Solutions 1. What is the difference between book value accounting and market value accounting? How do interest rate changes affect the value of bank assets and liabilities under the

### Fixed-Income Securities Lecture 4: Hedging Interest Rate Risk Exposure Traditional Methods

Fixed-Income Securities Lecture 4: Hedging Interest Rate Risk Exposure Traditional Methods Philip H. Dybvig Washington University in Saint Louis Matching maturities Duration Effective duration Multiple

### Chapter 6. Discounted Cash Flow Valuation. Key Concepts and Skills. Multiple Cash Flows Future Value Example 6.1. Answer 6.1

Chapter 6 Key Concepts and Skills Be able to compute: the future value of multiple cash flows the present value of multiple cash flows the future and present value of annuities Discounted Cash Flow Valuation

### I. Readings and Suggested Practice Problems. II. Risks Associated with Default-Free Bonds

Prof. Alex Shapiro Lecture Notes 13 Bond Portfolio Management I. Readings and Suggested Practice Problems II. Risks Associated with Default-Free Bonds III. Duration: Details and Examples IV. Immunization

### Course FM / Exam 2. Calculator advice

Course FM / Exam 2 Introduction It wasn t very long ago that the square root key was the most advanced function of the only calculator approved by the SOA/CAS for use during an actuarial exam. Now students

### Mid-Term Exam Practice Set and Solutions.

FIN-469 Investments Analysis Professor Michel A. Robe Mid-Term Exam Practice Set and Solutions. What to do with this practice set? To help students prepare for the mid-term exam, two practice sets with

### YIELD CURVE GENERATION

1 YIELD CURVE GENERATION Dr Philip Symes Agenda 2 I. INTRODUCTION II. YIELD CURVES III. TYPES OF YIELD CURVES IV. USES OF YIELD CURVES V. YIELD TO MATURITY VI. BOND PRICING & VALUATION Introduction 3 A

### Finding the Payment \$20,000 = C[1 1 / 1.0066667 48 ] /.0066667 C = \$488.26

Quick Quiz: Part 2 You know the payment amount for a loan and you want to know how much was borrowed. Do you compute a present value or a future value? You want to receive \$5,000 per month in retirement.

### How to calculate present values

How to calculate present values Back to the future Chapter 3 Discounted Cash Flow Analysis (Time Value of Money) Discounted Cash Flow (DCF) analysis is the foundation of valuation in corporate finance

### FinQuiz Notes 2 0 1 4

Reading 5 The Time Value of Money Money has a time value because a unit of money received today is worth more than a unit of money to be received tomorrow. Interest rates can be interpreted in three ways.