Practice Questions

Bond Valuation
Qs.
The Pennington Corporation issued a new series of bonds on January 1,
1985. The bonds were sold at par ($1,000), have a 12 percent coupon,
and mature on December 31, 2014 (30 years after issue). Coupon
payments are made semi-annually (on June 30 and December 31)
a. What was the YTM of Pennington’s bonds on January 1, 1985?

b. What was the price of the bond on January 1, 1990, five years
later, assuming that the level of interest rates had fallen to 10 percent?
Ans.
Ans.a . Whenever bonds are sold at par, the YTM equals the coupon
rate and therefore YTM=12%.
Ans.b. The price of the bond on January 1, 1990 (i.e five years later), is
the present value of future cashflows. The period from January 1, 1990
until December 31, 2014, (i.e. the date of maturity of the series of
bonds) is 25 years. However, as coupon payments are made semi-
annually, this will be 25*2=50 periods.

1 − (1.051 )50   1 
Vd = 60 *   + 1,000 50 
 0.05   (1.05) 
= 60(18.25593) + 1,000(0.08720) = 1095.36 + 87.20 = 1,182.56
Qs.
• An analyst observes a 5-year, 10% semiannual-pay bond. The face
amount is £1,000. The analyst believes that the yield-to-maturity on a
semiannual bond basis should be 15%. Based on this yield estimate,
the price of this bond would be?
Ans.
Qs.
Qs.
• Mr. A purchases a T-Bill with a face value of $100,000 and pays
$97,000 for it—representing a $3,000 discount. The maturity date is
in 279 days. The bank discount yield would be ?
Ans
Qs
• Suppose that a 91- day US Treasury bill (T- bill) with a face value of
USD10 million is quoted at a discount rate of 2.25% for an assumed
360- day year. The price of the T- bill is?
Ans.
Qs
• A Canadian pension fund buys a 180- day banker’s acceptance (BA)
with a quoted add- on rate of 4.38% for a 365- day year. If the initial
principal amount is CAD10 million, the redemption amount due at
maturity is?
Ans