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Practice Quiz 3: Bonds

1. This question has two parts.

a. What is the price of a 20-year, zero-coupon bond with a 5.1% yield


and $1,000 face value?

$1000
By hand: PV = = $369.78
(1 + 0.051)
20

On the HP-12C:
n = 20
i = 5.1
PMT = 0
FV = 1000
So PV = -369.78

b. Take the above bond and add annual 4.8% coupons. What is the
price of this new bond?

$48 ⎛ ⎛ ⎞
20
1 ⎞ $1000
By hand: PV = ⎜⎜1 − ⎜ ⎟ ⎟⎟ + = $962.93
0.051 ⎝ ⎝ 1 + 0.051 ⎠ ( )
20
⎠ 1 + 0.051

On the HP-12C:
n = 20
i = 5.1
PMT = 48
FV = 1000
So PV = -962.93

2. What is the price of a 3-year, U.S. corporate bond with 3.4% coupon, a 3.6%
yield, and a $1,000 face value? Remember that corporate bonds, just like
Treasury bonds, pay semi-annual coupons.

$17 ⎛ ⎛ ⎞
6
1 ⎞ $1000
By hand: PV = ⎜⎜ 1 − ⎜ ⎟ ⎟⎟ + = $994.36
0.018 ⎝ ⎝ 1 + 0.018 ⎠ ( )
6
⎠ 1 + 0.018

On the HP-12C:

Foster MBA – Finance Jump Start – Thomas Gilbert


n = 2*3 = 6
i = 3.6/2 = 1.8
PMT = 34/2 = 17
FV = 1000
So PV = -994.36

3. This question has two parts.

a. What is the price of a 3-year Eurobond with 5% annual coupons, a


face value of $1,000, and the following spot rates: r1 = 4.5%, r2 =
5.5%, and r3 = 6%?

You have to solve this by hand:


$50 $50 $1050
PV = + + = $974.37
1 + 0.045 (1 + 0.055 ) (1 + 0.06 )3
2

b. What is the yield-to-maturity of the above bond?

You have to solve this using the HP-12C:


n=3
PV = -974.37
PMT = 50
FV = 1000
So i = 5.96%

Foster MBA – Finance Jump Start – Thomas Gilbert