Problem 1: Calculate the present value(Price) of a Tk.
1000 zero-coupon bond with 5 years to maturity if the
yield to maturity is 6%.
𝑇𝑘.1000
P= = Tk.747.26
1+.06 5
Problem 2: A lottery claims its grand prize is Tk.10 million, payable over 20 years at Tk.500,000
per year. If the first payment is made immediately, what is this grand prize really
worth? Use a discount rate of 6%.
1 1
1− 1+𝑖 𝑛 1−
1+.06 20
P=c [ ] (i+i)= Tk. 500,000 [ ] (1+.06)= 6,079,058
𝑖 .06
Problem 3: Consider a bond with a 7% annual coupon and a face value of $1,000. Complete the following
table. What relationships do you observe between maturity and discount rate and the current price?
Years to Maturity Yield to Maturity Current Price
3 5% 1,054.46
3 7% 1,000.00
3 9% 949.37
6 7% 1,000.00
9 5% 1,142.16
9 9% 880.10
When the coupon rate is equal to the yield to maturity then the current bond price is equal to the bond’s
face value for any maturity.
When the yield to maturity is above the annual coupon then the bond’s current price is below the face
value. When it is below then the bond’s current price is above the face value.
If the yield to maturity is not equal to the coupon rate and is kept constant for different maturities then the
shorter maturity bond will have a price closer to the current price than the longer maturity bond.
Problem 4: Consider a coupon bond that has a Tk.1000 par value and a
coupon rate of 10%. The bond is currently selling for Tk.1150 and has
eight years to maturity. What is the bond’s yield to maturity?
𝐹−𝑃 1000−1150 −150
𝐶+ 𝑛 100+ 8
100+ 8 100−18.75
YTM= 𝐹+𝑃 = 1000+1150 = 1000+1150 = = .0756=7.56%
1075
2 2 2
Problem5: . What is the price of a perpetuity that has a coupon of Tk.50
per year and a yield to maturity of 2.5%? If the yield to maturity doubles,
what will happen to its price?
𝑇𝑘.50
P= = Tk.2000
.025
𝑇𝑘.50
If the yield to maturity doubles, then P = = Tk.1000
.05
Problem 11: A bond makes an annual Tk.80 interest payment (8%
coupon). The bond has five years before it matures, at which time
it will pay Tk.1000. Assuming a discount rate of 10%,
what should be the price of the bond?
1
1− 𝑇𝑘.1000
1+.10 5
P = Tk80 [ ]+ = 303.27+ 620.92=924.19
.10 1+.10 5
Problem 13:
Price of A:
1
1−
1−
1 𝑖 𝑛∗2
𝐹 𝐶 1+2 𝐹
1+𝑖 𝑛
P= c [ ]+ = [ 𝑖 ]+ 𝑖 𝑛∗2
𝑖 1+𝑖 𝑛 2 1+2
2
1
1−
.08 15∗2
100 1+ 1000
2
𝑃𝐴 = [ .08 ]+ .08 15∗2
2 1+
2 2
1
1− 1000
1+.04 30
= 50 [ ]+ = 864.60 + 308.32 = $1172.92
.04 1+.04 30
1
1−
.08 20∗2
60 1+ 2 1000
𝑃𝐵 = [ .08 ]+ .08 20∗2
2 1+ 2
2
1
1− 1000
1+.04 40
= 30 [ ]+ = 593.78 + 208.29 = $1172.92=802.07
.04 1+.04 40
b) If a bond sells at discount, its coupon rate is lower than required rate of
return. If a bond sells at premium, its coupon rate is higher than required
rate of return. If the a bond sells at par, it coupon rate is equal to required
rate of return.
Bond A is selling at premium and bond B is selling at discount.
15. If the municipal bond rate is 4.25% and the corporate bond rate
is 6.25%, what is the marginal tax rate, assuring investors are
indifferent between the two bonds?
Equivalent tax-free rate = taxable interest rate × (1 –marginal tax rate)
.0425 = .0625 × (1 – T)
.0425/.0625 = (1 – T)
.68= 1 – T
T = 1-.68= .32= 32%