University of Virginia - math1140: Financial Mathematics Fall 2011

Bonds Practice Problems November 25, 2011

Some of these problems were created by Professor Jeff Holt for a previous version of this
class. Some of these problems are from the textbook.
Problem 1. An annuity will make 60 quarterly payments (the first a year from now) of $3200
each. If the yield rate is 8% convertible quarterly, what is the price of the annuity?
Problem 2. Alf borrows some money from Bill at 9% effective, and will repay the loan with 9
equal annual installments (the first coming a year from now) of $2500 each. After 4 payments
are made, Bill sells his right to the remaining payments to Cathy at a price that produces a
yield rate of 12% effective. How much does Cathy pay Bill?
Problem 3. Eight years ago, Tom took out a 20-year loan of $50, 000 at an effective rate of 7%,
and since then has made annual payments, the first a year after the loan was made. Immedi-
ately after the eighth payment, he wants to make a lump sum payment of $20, 000, and then
pay off the loan with 5 more annual payments. The lender will agree to this plan, provided
the yield on the remaining balance is 10% effective. What is the new annual payment?
Problem 4. Eight years ago, Tom took out a 20-year loan of $50, 000 at an effective rate
of 7%, and since then has made annual payments, the first a year after the loan was made.
Immediately after the eighth payment, he wants to make a lump sum payment of $20, 000,
and then pay off the loan with 5 more annual payments. The lender will agree to this plan,
provided the yield on the entire balance is 10% effective. What is the new annual payment?
Problem 5. A 10-year bond with a face value of $1, 000, redeemable at par, earns interest at
9% convertible semiannually. Describe the payments to the holder of the bond.
Problem 6. A 10-year bond with a face value of $1000, redeemable at par, earns interest at 9%
convertible semiannually. Find the price to yield an investor 7% convertible semiannually.
Problem 7. A 12-year bond with a face value of $500, redeemable at par, earns interest at 10%
convertible semiannually. Find the price to yield an investor 11% convertible semiannually.
Problem 8. An 8-year bond with a face value of $2000, redeemable at twice par, earns in-
terest at 6% convertible semiannually. Find the price to yield an investor 5% convertible
semiannually.
Problem 9. Suppose that two bonds have $2500 face values, are redeemable at par on the
same maturity date, and yield 10% convertible semiannually. One bond pays coupons at 8%
per year convertible semiannually and costs $2229.06. The other bond pays coupons at 6%
per half-year. What is the price of the second bond?
Problem 10. Suppose that a 15-year $5000 face value bond, redeemable at par, has r = 0.04
and pays semiannual coupons. If the yield rate is 6% convertible semiannually, what is the
book value immediately after the 16th coupon is paid?

Bonds Practice Problems-1