The price of any bond is the PV of the interest payment, plus the PV of the par value.

Notice this problem assumes an a

P = $75({1 – [1/(1 + .0875)]10 } / .0875) + $1,000[1 / (1 + .0875)10] = $918.89

We would like to introduce shorthand notation here. Rather than write (or type, as the case may be) the entire equatio

PVIFR,t = 1 / (1 + r)t

which stands for Present Value Interest Factor

PVIFAR,t = ({1 – [1/(1 + r)]t } / r )

which stands for Present Value Interest Factor of an Annuity

These abbreviations are short hand notation for the equations in which the interest rate and the number of periods are

Cupon 75
Vnominal 1000
YTM 8.75%
Precio
Flujo de efectivo
75 75 75 75 75 75 75
0 1 2 3 4 5 6 7
918.888925 68.9655172 63.4165676 58.3140851 53.6221472 49.3077216 45.3404337 41.6923528
VP cupones 486.666452
VP nominal 432.222473
Precio 918.888925 C 1
VP  1 
r  (1  r )
is problem assumes an annual coupon. The price of the bond will be:

ay be) the entire equation for the PV of a lump sum, or the PVA equation, it is common to abbreviate the equations as:

he number of periods are substituted into the equation and solved. We will use this shorthand notation in remainder of the solutions k

1000
75 75 1075
8 9 10
38.3377957 35.2531454 464.639158

C  1 
P 1 
 (1  r )T 
r  
equations as:

remainder of the solutions key.

Here we need to find the YTM of a bond. The equation for the bond price is:

P = $934 = $90(PVIFAR%,13 + $1,000(PVIFR%,13)

Notice the equation cannot be solved directly for R. Using a spreadsheet, a financial calculator, or trial and err

R = YTM = 9.93%

If you are using trial and error to find the YTM of the bond, you might be wondering how to pick an interest ra
cupon
Approximate YTM = [Annual interest payment + (Price difference from par / Years to maturity)] /
[(Price + Par value) / 2]

Solving for this problem, we get: 66

Approximate YTM = [$90 + ($66 /13] / [($934 + 1,000) / 2] =9.83%

Cupon 90
Diferencia en precio 66
T 13
(precio+valor nominal)/2 967
YTM aprox. 9.83%
This is not the exact YTM, but it is close, and it will give you a place to start.
Cupon 9% 90.00
Vnominal 1,000
Precio 934

0 -934
1 90 81.9 1
2 90 74.5 2
3 90 67.8 3
4 90 61.6 4
5 90 56.1 5
6 90 51.0 6
7 90 46.4 7
8 90 42.2 8
9 90 38.4 9
10 90 34.9 10
11 90 31.8 11
12 90 28.9 12
13 1090 318.5 13
TIR/YTM 9.93% 934.0
VPN -0.00
calculator, or trial and error, we find:

how to pick an interest rate to start the process. First, we know the YTM has to be higher than the coupon rate since the bond is a discoun

maturity)] /
rate since the bond is a discount bond. That still leaves a lot of interest rates to check. One way to get a starting point is to use the followi
arting point is to use the following equation, which will give you an approximation of the YTM:
Here we need to find the coupon rate of the bond. All we need to do is to set up the bond pricing equation an

P = $924 = C(PVIFA3.4%,29) + $1,000(PVIF3.4%,29)

Solving for the coupon payment, we get:

C = $29.84
Since this is the semiannual payment, the annual coupon payment is:

2 × $29.84 = $59.68

And the coupon rate is the annual coupon payment divided by par value, so:
Coupon rate = $59.68 / $1,000
Coupon rate = .0597 or 5.97%
Años Semestres
Tiempo 14.5 29.00 SEM
YTM 6.80% 3.4% SEM
Precio 924
Cupon
Tasa cupon
Vnominal 1000
VP Vnominal 379.231476
VP Cupon 544.768524
Cupon 29.8374178 C 1 
Cupon anual 59.6748356 VP  1 
r  (1  r )T 
Tasa cupon 5.97%
the bond pricing equation and solve for the coupon payment as follows:
Any bond that sells at par has a YTM equal to the coupon rate. Both bonds sell at par, so the initial YTM on bo

Aumento de tasa PSam = $45(PVIFA5.= $950.04 Tasa cupón 9%

Precio inicial 1000
Tiempo 3
Cupón 90
Precio final 725.245833

PDave = $45(PVIFA5.= $839.54 Tasa cupón 9%

Precio inicial 1000
Tiempo 20
Cupón 90
Precio final 117.463142

The percentage change in price is calculated as:

Percentage change in price = (New price – Original price) / Original price

DPSam% = ($950.04 – = – 5.00%

DPDave% = ($839.54 – = – 16.05%

If the YTM suddenly falls to 7 percent:

PSam = $45(PVIFA3.= $1,053.29

PDave = $45(PVIFA3.= $1,213.55

DPSam% = ($1,053.29 – 1,000) / $1,000 = + 5.33%

DPDave% = ($1,213.55 – 1,000) / $1,000 = + 21.36%

All else the same, the longer the maturity of a bond, the greater is its price sensitivity to change

Reducciòn de tasa Tasa cupón 9%

Precio inicial 1000
Tiempo 3
Cupón 90
Precio final 813.500644

Tasa cupón 9%
Precio inicial 1000
Tiempo 20
Cupón 90
Precio final 252.572468
par, so the initial YTM on both bonds is the coupon rate, 9 percent. If the YTM suddenly rises to 11 percent:
YTM Cambio en tasa
YTM 9% 2% 11%
Valor par 5.5%
6 Semestre
45 Semestre
224.79886388897 950 -5%

YTM 9% 2% 11%
5.5%
40 Semestre
45 Semestre
722.07561084175 839.538753 -16%

e) / Original price C  1 
VP  1 
 (1  r )T 
r  

s price sensitivity to changes in interest rates.

YTM Cambio en tasa
YTM 9% -2% 7%
Valor par 3.5%
6 Semestre
45 Semestre
239.78488589003 1053 5%

YTM 9% -2% 7%
3.5%
40 Semestre
45 Semestre
960.97825517839 1213.55072 21%
The company should set the coupon rate on its new bonds equal to the required return. The required return can

P = $930 = $40(PVIFAR%,40) + $1,000(PVIFR%,40)

Using a spreadsheet, financial calculator, or trial and error we find:

R = 4.373%

This is the semiannual interest rate, so the YTM is:

YTM = 2 ´ 4.373% = 8.75%
Años Semestres Semestre
Tiempo 20 40
Cupon 8% 80 40
Vnominal 1,000

Approximate YTM = [Annual interest payment + (Price difference from par / Years to maturity)] /
[(Price + Par value) / 2]

Cupon 40
Diferencia en 70
T 40
(precio+valor 965
YTM aprox. 4.33%
YTM anual 8.65% TASA CUPÒN
return. The required return can be observed in the market by finding the YTM on the outstanding bonds of the company. So, the YTM on t

om par / Years to maturity)] /

f the company. So, the YTM on the bonds currently sold in the market is:
Accrued interest is the coupon payment for the period times the fraction of the period that has passed since the

Accrued interest = $74/2 × 2/6 = $12.33 Dic 12.33

2
And we calculate the clean price as:

Clean price = Dirty price – Accrued interest = $968 – 12.33 = $955.67

Precio 968
V nominal 1000
Tasa cupon 7.40% ANUAL
Cupon 74 37 SEM
Plazo para cupón 4
Corrido 2
Plazo cupón 6
Interés corrido 12.3333333
Precio limpio=precio sucio-interés corrido 955.666667
955.666667
that has passed since the last coupon payment. Since we have a semiannual coupon bond, the coupon payment per six months is one-hal

feb Junio
4

37 0.33 12.33
yment per six months is one-half of the annual coupon payment. There are four months until the next coupon payment, so two months ha
pon payment, so two months have passed since the last coupon payment. The accrued interest for the bond is:
Accrued interest is the coupon payment for the period times the fraction of the period that has passed since the

Accrued interest = $68/2 × 4/6 = $22.67

And we calculate the dirty price as:

Dirty price = Clean price + Accrued interest = $1,073 + 22.67 = $1,095.67

Precio 1073
V nominal 1000
Tasa cupon 6.80%
Cupon 68 ANUAL 34 SEM
Plazo para c 2
Corrido 4
Plazo cupón 6
Interés corri 22.6666667
Precio sucio=precio limpio + interés cor 1095.66667
1095.66667
eriod that has passed since the last coupon payment. Since we have a semiannual coupon bond, the coupon payment per six months is on
on payment per six months is one-half of the annual coupon payment. There are two months until the next coupon payment, so four mon
t coupon payment, so four months have passed since the last coupon payment. The accrued interest for the bond is:
9 We can use the constant dividend growth model, which is:

Pt = Dt × (1 + g) / (R – g) Div1 2.35
g 5%
So the price of each company’s stock today is: Rr 8%
Ra 11%
Red stock pri = $2.35 / (.08 – .05) = $78.33 Ra 14%
Yellow stock p= $2.35 / (.11 – .05) = $39.17
Blue stock pri= $2.35 / (.14 – .05) = $26.11
As the required return increases, the stock price decreases. This is a function of the time value o
 P

78.33
39.17
26.11

function of the time value of money: A higher discount rate decreases the present value of cash flows. It is also important to note tha
s also important to note that relatively small changes in the required return can have a dramatic impact on the stock price.
the stock price.
Here we have a stock that pays no dividends for 10 years. Once the stock begins paying dividends, it will have

Pt = [Dt × (1 + g)] / (R – g) Div1

This means that since we will use the dividend in Year 10, we will be finding the stock price in Ye

P9 = D10 / (R – g) = $10.00 / (.14 – .05) = $111.11 111.11 34.1672075

3.25194852

The price of the stock today is simply the PV of the stock price in the future. We simply discount
P0 = $111.11 / 1.149 = $34.17
paying dividends, it will have a constant growth rate of dividends. We can use the constant growth model at that point. It is important

finding the stock price in Year 9. The dividend growth model is similar to the PVA and the PV of a perpetuity: The equation gives you t

e future. We simply discount the future stock price at the required return. The price of the stock today will be:
at that point. It is important to remember that general constant dividend growth formula is:

ty: The equation gives you the PV one period before the first payment. So, the price of the stock in Year 9 will be:
The constant growth model can be applied even if the dividends are declining by a constant percentage, just mak

P0 = D0 (1 + g) / (R – g) Div0 10.46
P0 = $10.46(1 – .04) / [(.115 – (–.04)] Div1 10.0416 15.500%
P0 = $64.78 g -4%
a constant percentage, just make sure to recognize the negative growth. So, the price of the stock today will be:

64.7845161