Exercises Chapter 8
Q2.
Semiannual payments, T = 15 years, FV = $1000
Coupon rate = 7% → C = $70
a. YTM = 7%
𝑟 −2𝑇
𝐶 1 − (1 + ) 𝐹𝑉
𝑃= 𝑥 2 + = $1000
2 𝑟 𝑟 2𝑇
2 (1 + )
2
b. YTM = 9%
𝑟 −2𝑇
𝐶 1 − (1 + 2) 𝐹𝑉
𝑃= 𝑥 𝑟 + = $837.11
2 𝑟 2𝑇
2 (1 + )
2
c. YTM = 5%
𝑟 −2𝑇
𝐶 1 − (1 + ) 𝐹𝑉
𝑃= 𝑥 2 + = $1209.30
2 𝑟 𝑟 2𝑇
2 (1 + )
2
Q3.
T = 13 years
Coupon rate = 6.2% → C = $62
P = 98% x $1000 = $980
Semiannual payments:
𝑟 −2𝑇
𝐶 1 − (1 + 2) 𝐹𝑉 62 1 − (1 + 𝑟)−2𝑥13 1000
𝑃= 𝑥 𝑟 + = 𝑥 𝑟 + = 980
2 𝑟 2𝑇 2 𝑟 2𝑥13
2 (1 + ) 2 (1 + )
2 2
→ YTM = r = 6.43%
Q4.
T = 11.5 years, YTM = 6.8%, P = $1055
Semiannual payments:
𝑟 −2𝑇
𝐶 1 − (1 + ) 𝐹𝑉
𝑃= 𝑥 2 +
2 𝑟 𝑟 2𝑇
2 (1 + )
2
6.8% −2𝑥11.5
𝐶 1 − (1 + 2 ) 1000
= 𝑥 + = 1055
2 6.8% 6.8% 2𝑥11.5
2 (1 + )
2
→ C = $74.97
74.97
→𝐶𝑜𝑢𝑝𝑜𝑛 𝑟𝑎𝑡𝑒 = = 7.5%
1000
Q5.
Annual payments, T = 15 years, FV = $1000, YTM = 4.3%
Coupon rate = 5.1% → C = $51
1 − (1 + 𝑟)−𝑇 𝐹𝑉
𝑃 = 𝐶𝑥 + = $1087.11
𝑟 (1 + 𝑟 ) 𝑇
Q6.
T = 17 years
FV: $100,000
P = 106% x $1000 = $106,000
Coupon rate = 2.8% → C = $2800
Annual payments:
1 − (1 + 𝑟)−𝑇 𝐹𝑉 1 − (1 + 𝑟)−17 100,000
𝑃 = 𝐶𝑥 + 𝑇
= 2800𝑥 + = 106,000
𝑟 (1 + 𝑟 ) 𝑟 (1 + 𝑟)17
→ YTM = r = 2.37%
Q15.
This is a Premium Bond because the selling price is higher than face value.
The dollar asked price is:
𝑃 = 𝐴𝑠𝑘𝑒𝑑 𝑥 𝐹𝑉 = 128.4688% 𝑥 10,000 = $12,846.88
Current yield:
𝐶 4.375% 𝑥 10,000
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑖𝑒𝑙𝑑 = = = 3.405%
𝑃 12,846.88
The YTM is located under the “Asked Yield” column, so the YTM is 2.665%.
Bid-ask spread in dollars:
𝐵𝑖𝑑 − 𝐴𝑠𝑘 𝑠𝑝𝑟𝑒𝑎𝑑 = (𝐴𝑠𝑘𝑒𝑑 − 𝐵𝑖𝑑 ) 𝑥 𝐹𝑉 = (128.4688% − 128.4063%) 𝑥 10,000
= $6.25
Q16.
Semiannual compounding, T=20 years, FV= $1000, YTM=5.7%
Initial price of bond:
𝐹𝑉 1000
𝑃= = 2𝑥20 = $324.96
𝑟 2𝑇 5.7%
(1 + ) (1 + )
2 2
Price after holding bond for 1 year:
𝐹𝑉 1000
𝑃1 = = 2𝑥19 = $343.75
𝑟 2𝑇 5.7%
(1 + ) (1 + )
2 2
Implied interest = 𝑃1 − 𝑃 = 343.75 – 324.96 = $18.79
Q17.
● Bond Miller:
Semiannual payments, T=13 years, FV = $1000, YTM=5.3%
Coupon rate = 6.5% → C = $65
𝑟 −2𝑇
𝐶 1 − (1 + ) 𝐹𝑉
𝑃= 𝑥 2 +
2 𝑟 𝑟 2𝑇
2 (1 + )
2
P0 = 1111.71 P3 = 1092.22 P12 = 1011.54
P1 = 1105.55 P8 = 1052.11 P13 = 1000
● Bond Modigliani:
Semiannual payments, T= 13 years, FV = $1000, YTM=6.5%
Coupon rate = 5.3% → C = $53
𝑟 −2𝑇
𝐶 1 − (1 + ) 𝐹𝑉
𝑃= 𝑥 2 +
2 𝑟 𝑟 2𝑇
2 (1 + )
2
P0 = 895.76 P3 = 912.76 P12 = 988.56
P1 = 901.07 P8 = 949.47 P13 = 1000
All other factors remaining constant, the premium above par value for a premium
bond gradually decreases as the bond approaches maturity, while the discount
below par value for a discount bond similarly reduces over time. This process is
referred to as “pull to par”.
In both cases, the greatest percentage changes in price occur when the bond has the
shortest time left until maturity. It’s also important to note that, at maturity, the
price of every bond equals its par value, even though the investor receives both the
par value and the final coupon payment immediately. This is because bond prices
are calculated using the clean price, which excludes accrued interest.
MATURITY AND BOND PRICE
1,150.00
1,100.00
1,050.00
BOND PRICE
1,000.00
950.00
900.00
850.00
13 12 10 5 1 0
MATURITY (YEARS)
Bond Miller Bond Modigliani