Download Chapter ending questions

Chapter 1 – Introduction
Chapter 2 – Pricing of Bonds
Chapter 3 – Measuring Yield
Chapter 4 – Bond Price Volatility
Chapter ending
questions
4,8,12,15,17
2,3,4,7,9,11
1,5,7,12,13,16
2,3,4,13,15
1.4 A 10-year semi-annual pay bond with a 7% coupon rate and face value of $100,000 will pay semi-annual
interest of $3,500 for 20 payments and in addition pay $100,000 face value with the last coupon payment.
1.8 Floating rate notes reset the coupon rate on specified dates to the reference rate (a market determined rate)
plus the margin. The exact cash flow therefore is unknown and uncertain.
1.12 The principal repayment of a bond can call for either (1) the total principal to be repaid at maturity or (2)
the principal repaid over the life of the bond. In the latter case, there is a schedule of principal repayments.
This schedule is called amortization schedule.
1.15 Inclusion of a call feature benefits a bond issuer by allowing them to replace an old bond issue with a new
lower-interest issue if interest rates in the market decline. There are three disadvantages of the call feature for a
bond holder. First the cash flow of the bond is not known with certainty. Second, if the issuer calls the bond it
will occur most likely in a low interest rate environment. Third, the capital appreciation potential of a callable
bond is reduced relative to a straight bond.
1.17 A convertible bond is an issue giving the bondholder the right to exchange the bond for a specified
number of shares of common stock. An exchangeable bond allows the bondholder to exchange the issue for a
specified number of common stock shares of a corporation different from the issuer of the bond.
2.2 It will be short -$338,022.57
2.3 Future value of investment $768,872.47
2.4 Total future dollars $16,978,160.38
2.7 Necessary investment $13,111,510.32
2.9 Price of bond at required return of 15% = $541.25 at 16% = $509.09
2.11 Problem Bond quotes V, X, Y
3.1 11.987%
3.5 ytm(W) = 9.99928%
3.7 Show that the present value of cash flows (to maturity, to call, to put) equal current price when discounted
at (yield to maturity, yield to call, yield to put).
3.12 Total future dollars for $816 investd for 20 years at 9% compounded semi-annually = $4,746.15
3.13 8%
3.16 Total return 8.55%
4.2
PVBP(A) = $0.0181 per $100, PVBP(B) = $0.0416 per $100
D(A) = 1.8875 years, D(B) = 4.1542 years
D*(A) = 1.814948 years, D*(B) = 3.994417 years
C(A) = 4.2773350, C(B) = 19.7636077
4.3 Trick question: Small coupon large duration, Long time to maturity large duration.
4.4
P(A) = $98.2062, P(B) = $100
dP(A exact) = -1.7938, dP( exact) = -4.055
D*(A) = 1.805159, D*(B) = 3.956359
dP(A duration approx) -$1.805159, dP(B duration approx) = -4.116789
C(A) = 4.233125, C(B) = 19.452564
dP(A duration + convexity approx) = -1.784, dP(B duration + convexity approx) = -4.0156
4.13 Duration is the approximate percentage change in price for a small change in yield. It is possible for
duration to be greater than maturity.
4.15 Portfolio’s duration 8.9643