Exercise 1:

10
1000 95
1. PV of ABC bond = 10 +∑ n = $1100.65
(1+8 %) 1 (1+ 8 %)

5
1000 72.5
PV of XYZ bond = 5 ∑
+ n = $970.05
(1+8 %) 1 (1+ 8 %)

2. Expected rate of ABC bond:

10
1000 95
1050 = 10 +∑ n => k = 8.73%
(1+k % ) 1 (1+ k %)

Expected rate of XYZ bond:

5
1000 72.5
976 = 5 +∑ => k = 7.85%
(1+k % ) 1 (1+ k %)n

3. Compare to required rate of return: Should buy bond ABC because of higher expected return,
should not buy bond XYZ because of lower rate of return.

Exercise 2:
60
1000 40
a. PV =
(1+3.5 %)60 + ∑ n = $1124.72
1 (1+3.5 % )

10
1100 40
Yield to call: 1124.72 = 10 + ∑ n => i= 3.368% semiannually => 6.736% annually.
(1+i) 1 (1+i)

10
1050 40
b. Yield to call: 1124.72 =
(1+i)10 + ∑ n => i= 2.976% semiannually => 5.952% annually.
1 (1+i)

4
1100 40
c. 1124.72 =
(1+i) 4 + ∑ n => i=3.031% semiannually => 6.062% annually.
1 (1+i)

Exercise 3:

a. Effective annual rate for 3-month T-bill:

100000 4 4
( ) −1=1.02412 −1=0.1
97645
b. Effective annual interest rate for coupon bond paying 5% semiannually:

1.052−1=0.0125
 The coupon bond has the higher effective annual interest rate.

Exercise 4:
Effective annual yield = (1+( 8 % /2))2 −1 = 0.0816 = 8.16%

The effective annual yield on the semiannual coupon bonds is 8.16%. If the annual coupon bonds are to
sell at par they must offer the same yield, which requires an annual coupon rate of 8.16%.

Exercise 5:

The par value of the bond here is $1000, since the bond pays 10% coupon rate, hence one year the
payment would be $100, then semiannual payment is $50.

50 1 1000
a. Current price = ∗（ 1− 6) + = $1,052.42
4% （ 1+ 4 % ） （ 1+ 4 % ） 6
b. If the market interest rate remains 4% per half year, price six months from now is:

50 1 1000
∗（ 1− 5) + = $1,044.52
4% （ 1+ 4 % ） （ 1+ 4 % ） 5
$ 50+($ 1044.52−$ 1052.42) $ 50−$ 7.90
b. Rate of return = = = 4.0%
$ 1052.42 $ 1052.42
Exercise 6:

40 1 1000
a. Semi-annual basis Yield to maturity = 950 = (1− )
40 + => i = 0.0426
i ( 1+i ) (1+i) 40
 Bond equivalent yield to maturity: 0.0426 * 2 = 0.0852
 Effective annual yield to maturity = ¿ – 1 = 0.0870 = 8.70%
b. Bond price = Par value => Semiannual YTM = 0.04
 Bond equivalent yield to maturity is 8%.
 Effective annual yield to maturity = 1.04 2 – 1 = 0.0816 = 8.16%
40 1 1000
c. Semi-annual basis Yield to maturity = 1050 = (1− )
40 + => i = 0.0376
i ( 1+i ) (1+i) 40
 Bond equivalent yield to maturity: 0.0376 * 2 = 0.0752
 Effective annual yield to maturity = ¿ – 1 = 0.0870 = 8.70%