Assignment 2,

Due date: October 31, 2023. 11:59 pm (blackboard system time) Online submission.
Late submission penalty 5% per day

1. What is the annual coupon rate on a bond that has par value of $1,000, a market value of
$1,100 and an annual coupon interest payment of $60 per year.

Ans 6%

2. Which of the following bond has more price risk?

A. 10-year bond
B. 5-year bond

Ans. A

3. An European company issues a bond with a par value of €1,000, 23 years to maturity, and
a coupon rate of 3.8 percent paid annually. If the yield to maturity is 4.7 percent, what is the
current price of the bond? Assume the bond pays annual coupon.

Ans The price of any bond is the PV of the interest payments, plus the PV of the par value.
Notice this problem assumes an annual coupon. The price of the bond will be:

P = €38({1 – [1/(1 + .04723)] }/.047) + €1,000[1/(1 + .047)23]

P = €875.09

4. A Japanese company has a bond outstanding that sells for 105.43 percent of its ¥100,000
par value. The bond has a coupon rate of 3.4 percent paid annually and matures in 16 years.
What is the yield to maturity of this bond? Note: you can try the given yields with non-
financial calculator or excel.

A. about 2.9687%
B. about 4.202%
C. Not enough information

Ans. A see assignment 2 Q4 5 6 bond price calculation.xlsx

Note: You will not be asked to calculate the yield directly.

The equation for the bond price is:

P = ¥105,430 = ¥3,400(PVIFAR%,16) + ¥100,000(PVIFR%,16)

Notice the equation cannot be solved directly for R. Using a spreadsheet, a financial
calculator, or trial and error, we find: R = YTM = 2.9687%
5. Student Corp. has a $2,000 par value bond outstanding with a coupon rate of 4.4 percent
paid semiannually and 12 years to maturity. The yield to maturity of the bond is 4.8
percent. What is the price of the bond? If interest rates remain unchanged, what do you
expect the price of the bond to be one year from now?

Ans. To find the price of this bond, we need to find the present value of the bond’s cash flows.
So, the price of the bond is:

P = $44(PVIFA 2.40%,24) + $2,000(PVIF 2.40%,24)

P = $1927.6633

P = $44(PVIFA 2.40%,22) + $2,000(PVIF 2.40%,22)

P = 1932.2455

6. Bond James has a coupon rate of 3 percent. The bond has 14 years to maturity, makes
semiannual payments, and have a YTM of 6 percent. If interest rates suddenly rise by 1
percent, what is the percentage price change of the bond? The par value of the bond is
$1000.

Ans
Initially, at a YTM of 6 percent, the prices of the two bonds are:
PJ = $15(PVIFA3%,28) + $1,000(PVIF3%,28) = $718.5384
If the YTM rises from 6 percent to 7 percent:
PJ = $15(PVIFA 3.5%,28) + $1,000(PVIF 3.5%,28) = $646.6596
The percentage change in price is calculated as:
Percentage change in price
= (New price – Original price)/Original price
= ($646.6596 – 718.5384)/$718.5384
= –10.00%

7. You purchase a bond with an invoice price (dirty price) of $948. The bond has a coupon
rate of 5.9 percent, and there are four months to the next semiannual coupon date. What is
the clean price of the bond? Hint: since we have a semiannual coupon bond, the coupon
payment per six months is one-half of the annual coupon payment. There are four months
until the next coupon payment, thus two months out of six months can be used for accrued
interest calculation. Face value of the bond is $1,000.

Ans. Accrued interest is the coupon payment for the period times the fraction of the
period that has passed since the last coupon payment. Since we have a semiannual
coupon bond, the coupon payment per six months is one-half of the annual coupon
payment. There are four months until the next coupon payment, so two months have
passed since the last coupon payment. The accrued interest for the bond is:

Accrued interest = $59/2 × 2/6

Accrued interest = $9.83
And we calculate the clean price as:

Clean price = Dirty price – Accrued interest

Clean price = $948 – 9.83
Clean price = $938.17