Prof Aharon (Roni) Ofer

HW assignment 1
Question 1

On 1.1.2011, “Bonders Inc.” issued a 7-year bond, with face value of $100 and a 6%
coupon rate. The bond pays annual coupon payments on December 31st. On the issuing
day, the TTM on similar bonds was 8%.
a. What was the price of the bond at the issuing date?
b. Suppose that two years after the bond was issued (right after the coupon payment), the
YTM for similar bonds drops to 7%. Calculate the price of the bond at that point in
time.
c. What is the effective annual return for an investor that bought the bond on the issuing
date and sold it 2 years later (after the coupon payment)?

Question 2

The following table presents the cash flow of three bonds. The YTM appropriate for
these bonds is 4%.

1) calculate the price of each bond
2) calculate the duration of each bond
3) if the YTM would change from 4% to 6% what would be the change in the prices of
the bonds.

bond/time 1 2 3
A 35 35 35
B 0 0 115
C 4 4 100
D 12 12 100

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d. b. The YTM of bond B. Prof Aharon (Roni) Ofer Question 3 Consider the cash flows of the following three bonds: Bond/year 0 1 2 A -100 105 0 B -100 7 107 C X 0 110 Find: a. c. The YTM of bond A. The price of bond C. The spot rates of periods 1 and 2. 2 .