FIN350 Exercise

1. What is the value of a 10-year, 10% annual coupon bond, if interest rate/discount
rate/YTM (r) = 10%?

N=10, PMT=100, FV=1000, I/YR=10, CPT PV=

Make sure your calculator sets 1 period in a year. To check the default setting, push
2nd and then I/YR, you should see 1 instead of 12.

2. For the same bond, if r decreases to 5%, what will be the bond price?

N=10 PMT= 100 FV=1000 I/YR= 5 CPT PV=

3. For the same bond, if r increases to 15%, what will be the bond price?

N=10 PMT=100 FV= 1000 I/YR= 15 CPT PV=

4. What is the value of a 1-year, 10% annual coupon bond, if r = 10%?

N=1, PMT=100, FV=1000, I/YR=10, CPT PV=

5. For the same 1-year bond, if r decreases to 5%, what will be the bond price?

N= 1 PMT=100 FV= 1000 I/YR= 5 CPT PV=

6. For the same 1-year bond, if r increases to 15%, what will be the bond price?

N= 1 PMT=100 FV=1000 I/YR= 15 CPT PV=

7. To sum up your result:

r 10 yr bond 1yr bond

5% $1386 $1047
10% $1000 $1000
15% $749 $956

8. From the above example I find that bond prices will _ _________
(decrease/increase) when interest rate increases. In addition, the price of longer

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 maturity bond is ____________ (more/less) sensitive to interest rate change than
price of short maturity bond.

9. I also find that if coupon rate is less than the interest rate, the bond will be selling
at ________(discount/premium.) and vice versa.

10. The long-term bonds issued by state and local governments in the United States are
called:
A) Treasury bonds.
B) Municipal bonds.
C) Floating rate bonds.
D) Junk bonds.
E) Zero coupon bonds.

11. A bond that makes no coupon payments (and thus is initially priced at a deep discount to
par value) is called a _______ bond.
A) Treasury
B) premium
C) floating rate
D) junk
E) zero coupon

12. Your broker offers you the opportunity to purchase a bond with coupon payments of $90
per year and a face value of $1000. Coupon is paid annually. Maturity is 5 years. If the
yield to maturity on similar bonds is 10%, this bond should:
A) Sell for the same price as the bond of same maturity.
B) Sell at a premium.
C) Sell at a discount.
D) Sell for either a premium or a discount but it's impossible to tell which.
E) Sell for par value.

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 1. What is the value of a 10-year, 10% annual coupon bond, if r = 10%?

N=10, PMT=100, FV=1000, I/YR=10, CPT PV=1000

Make sure your calculator sets 1 period in a year. To check the default setting, push
nd
2 and then I/YR, you should see 1 instead of 12.

2. For the same bond, if r decreases to 5%, what will be the bond price?

N=10 PMT= 100 FV=1000 I/YR= 5 CPT PV=$1386

3. For the same bond, if r increases to 15%, what will be the bond price?

N=10 PMT=100 FV= 1000 I/YR= 15 CPT PV=$749

4. What is the value of a 1-year, 10% annual coupon bond, if r = 10%?

N=1, PMT=100, FV=1000, I/YR=10, CPT PV=$1000

5. For the same 1-year bond, if r decreases to 5%, what will be the bond price?

N= 1 PMT=100 FV= 1000 I/YR= 5 CPT

PV=$1047

6. For the same 1-year bond, if r increases to 15%, what will be the bond price?

N= 1 PMT=100 FV=1000 I/YR= 15 CPT PV= $956

7. To sum up your result:

r 10 yr bond 1yr bond

5% $1386 $1047
10% $1000 $1000
15% $749 $956

8. From the above example I find that bond prices will _decrease_________
(decrease/increase) when interest rate kd increases. In addition, the price of longer

3
 maturity bond is ____________ (more/less) sensitive to interest rate change than
price of short maturity bond.

9. I also find that if coupon rate is less than the interest rate, the bond will be selling
at ________(discount/premium.) and vice versa.

10. The long-term bonds issued by state and local governments in the United States are
called:
A) Treasury bonds.
B) Municipal bonds.
C) Floating rate bonds.
D) Junk bonds.
E) Zero coupon bonds.

11. A bond that makes no coupon payments (and thus is initially priced at a deep discount to
par value) is called a _______ bond.
A) Treasury
B) premium
C) floating rate
D) junk
E) zero coupon

12. Your broker offers you the opportunity to purchase a bond with coupon payments of $90
per year and a face value of $1000. Coupon is paid annually. Maturity is 5 years. If the
yield to maturity on similar bonds is 10%, this bond should:
A) Sell for the same price as the bond of same maturity.
B) Sell at a premium.
C) Sell at a discount.
D) Sell for either a premium or a discount but it's impossible to tell which.
E) Sell for par value.