E120

Homework 4
Due 10/03/2014
1. A 30-year bond with a face value $1000 has a coupon rate of 5.5%, with semiannual
payments.
(a) What is the coupon payment for this bond?
(b) Draw the cash flows for the bond on a timeline.
2. Assume that a bond with make payments every six months for 20 periods (using sixmonth periods):
(0, $20, $20, ..., $20, $20+$1000).
(a) What is the maturity of the bond (in years)?
(b) What is the coupon rate (in percent)?
(c) What is the face value?
3. Suppose a five-year, $1000 bond with annual coupons has a price of $900 and a yield
to maturity of 6%. What is the bonds coupon rate?
4. Suppose a seven-year, $1000 bond with an 8% coupon rate and semiannual coupons is
trading with a yield to maturity of 6.75%.
(a) Is this bond currently trading at a discount, at par, or at a premium? Explain.
(b) If the yield to maturity of the bond rises to 7.00% (APR with semiannual compounding), what price will the bond trade for?
5. Find the yield to maturity (YTM) of the following bond:
Coupon rate of 6.25%,
pays semiannual coupons,
face value of $1000,
seven years to maturity, and
a price of $1125.
Before beginning to find the yield to maturity, determine if the YTM is less than the
coupon rate, greater than the coupon rate, or equal to the coupon rate.
6. Please indicate whether each of the following statements is true or false. If it is true,
explain/prove why it is true. If it is false, explain why or provide a counterexample.
(Credit will not be given unless an explanation is provided)

(a) Consider two cash flows a = (a1 , a2 , ..., an ) and b = (b1 , b2 , ..., bn ) with n >
1, a1 , b1 < 0 and ai , bi > 0 for i = 2, .., n. If the Internal Rate of Return (IRR)
of cash flow a is greater than the IRR of cash flow b, then the present value of
cash flow a must be greater than the present value of cash flow b for all positive
interest rates.
(b) Suppose we have two coupon bonds A and B with identical coupon rate c, Y T M
and face value F . If the maturity of bond A is larger than that of bond B, then
the price of A will be less than the price of B.