Homework Task – Week 2

Section 3

1 ) Write down the formula which is used to determine the yield to maturity on a 20-year 10% discount bond with $1, 500 face value that sells for $2, 000. Believe yearly discount codes. $2000 $100/(1 i) $100/(1 i)2 $100/(1 i)20 $1000/(1 i)20 2 . When there is a decline in rates of interest, which would you rather always be holding, long-term bonds or perhaps short-term a genuine? Why? Kind of of connection has the higher interest-rate risk? You would alternatively be keeping long-term provides because their particular price would increase more than price with the short-term bonds, giving them an increased return. a few. A financial advisor just given you this advice: " Long-term provides are a great purchase because their very own interest rate has ended 20%. ” Is the financial advisor always correct? No . If rates of interest rise dramatically in the future, long-term bonds can experience such a pointy fall in selling price that all their return might be quite low, potentially negative. four. If mortgage rates surge from five per cent to 10%, but the predicted rate of increase in enclosure prices goes up from 2% to 9%, are persons more or less more likely to buy houses? People are very likely to buy homes because the true interest rate the moment purchasing a house has decreased from a few percent (5 percent –2 percent) to 1 percent (10 percent 9 percent). The real expense of financing the property is therefore lower, although mortgage prices have increased. (If the tax deductibility of interest payments is allowed for, then it becomes even more probably that people is going to buy properties. ) Part 3 - Quantitative Questions

1 . Calculate the present worth of a $1, 000 zero-coupon bond with five years to maturity if the deliver to maturity is 6%. PV FV/(1 i)n in which FV 1000, we zero. 06, n 5 PHOTO VOLTAIC = 747. 25 2 . A lotto claims their grand price are $10 mil, payable over 20 years by $500, 000 per year. In the event the first payment is made right away, what is this kind of grand reward really worth? Use an interest rate of 6%. In excel you should use the function PV(0. 06, 20, 500000,, 1) = 6, 079, 058. Additionally you can lay out 20 cashflows in stand out and price cut each 1 using an interest rate of 0. 06 (remembering that the initial cashflow is immediate). The very last cashflow is 500000*(1. 06)^19 = 165, 257. three or more. Consider a bond with a 7% annual voucher and a face value of $1, 000. Finish the following table. What associations do you observe between maturity and lower price rate plus the current selling price? When the coupon rate is usually equal to the yield to maturity then the current relationship price is equal to the bond's face value for any maturity. When the produce to maturity is over a annual promotion then the bond's current price is below the confront value. When it is below then the bond's current price is over a face value. If the produce to maturity is not really equal to the coupon price and is retained constant for different maturities then your shorter maturity bond may have a price closer to the current price than the longer maturity bond. Years to Maturity

Yield to Maturity

Current Cost

3

5%

1, 054. 46

3

7%

you, 000. 00

3

9%

949. thirty seven

6

seven percent

1, 1000. 00

9

5%

one particular, 142. of sixteen

9

9%

880. 10

4. Look at a coupon connect that has a $1, 000 similar value and a promotion rate of 10%. The bond happens to be selling for $1, 150 and features eight years to maturity? What is the bond's deliver to maturity? To calculate the deliver to maturity using exceed you can use the function =Rate(8, -100, 1150, -1000) sama dengan 7. 44% 5. You are willing to spend $15, 625 now to get a perpetuity that may pay you as well as your heirs $1, 250 each year, forever, beginning at the end on this year. If the required level of return does not change, how much would you be willing to pay if this kind of were a 20-year, twelve-monthly payment, normal annuity instead of perpetuity? To find your " yield to maturity” for the perpetuity you take PHOTOVOLTAIC = CF/I 15, 625 = one particular, 250/I � I = 1, 250/15, 625 = 8%. From this level you need to use the PV function in excel PV(8%, 20, -1250) = & doze, 272. 68. 6. What is the price of a perpetuity which has a...

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