Bonds

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1. Write down the future cash flows of a 10% coupon (1000)(1+0.1)^5

bond, with a face value of €1000 issued today and with
a maturity in 5 years. 1610.51

2. Describe how to calculate the yield to maturity of the dividing a bond's

bond. face value by the
amount of interest
How is the yield related to the coupon rate? it pays.

If an investor pur-
chases a bond at
par or face value,
the yield to matu-
rity is equal to its
coupon rate

3. What is the relationship between interest rate and the Bond prices have
price of a bond? an inverse relation-
ship with interest
Explain rates. This means
that when interest
rates go up, bond
prices go down
and when inter-
est rates go down,
bond prices go up.

4. Explain the concept of duration as it relates to a bond. Bond duration is a

way of measuring
How would you calculate the duration of the bond? how much bond
prices are likely
to change if and
when interest rates
move.

dividing the sum

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 Bonds
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product of dis-
counted future
cash inflow of the
bond and a corre-
sponding number
of years by a sum
of the discounted
future cash inflow.

5. Show that the bond that lasts for 5 years can be viewed no clue
as two linked perpetuities.

6. Write down the future cash flows of a 5% coupon bond, (1000)(1+0.05)^5

with a face value of €1000 issued today and with a
maturity in 5 years. 1276.28

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