a.

If a bond’s coupon rate is higher than its yield to m

Answer: True because if the coupon rate is higher th

Also, that means that the bond is selling at a premiu
are greater than the return an investor would receiv

b.If a bond’s coupon rate is lower than its yield to m

Answer: True, If coupon rate is lower than the YTM,
investors are willing to buy it at discounted rate as th
Par value € 100.00 bond pmt
Coupon rate 5%
y 6% #nper
m 1
year 10

Bond Price (PV) € (92.64)

€ 5.00

10
A) For semi annual payments
Par $ 1,000.00
Coupon 5.50%
m 2
Years 10
Market Rate 5.20%

Price @ semi annual ($1,023.16)

B)

Market Rate
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
 For annual payments
Payment $ 27.50 Par
Coupon
nper 20 m
Years
periodic rate 2.60% Market Rate
market rate/m
Price @ annual

Periodic rate Price 8.00%

0.50% $1,427.22
1.00% $1,315.80
1.50% $1,214.61 7.00%

2.00% $1,122.64
2.50% $1,038.97 6.00%
3.00% $962.81
3.50% $893.41
4.00% $830.12 5.00%

4.50% $772.36
5.00% $719.60 4.00%
5.50% $671.36
6.00% $627.23
6.50% $586.81 3.00%

7.00% $549.75
2.00%
 3.00%

7.50% $515.76 2.00%

1.00%

0.00%
0% 2%
nnual payments
$ 1,000.00 Payment $ 55.00
5.50%
1 nper 10
10
5.20% periodic rate 5.20%
market rate/m
($1,022.94)

price vs periodic rate

2% 4% 6% 8% 10% 12%

Periodic rate Price

$1,600.00

$1,400.00

$1,200.00

$1,000.00

$800.00

$600.00

$400.00
 $600.00

$400.00

$200.00

$0.00
12% 14% 16%
A)

B)
C)
 Par
Coupon
m
Years
Market Rate

Price today for 5 year maturity

Coupon income
after one 1 year it will be 4 years/payments left until maturity
nper
periodic rate
Price(one year hence)

p1 (value at which I am selling it in one year)

p0 (value at which I bought the 5-year bond)
Rate of return
The relationship between the bond return over the particular period and
yield to maturity at the start and the end of the period is influenced by the
change in interest rate (whether it remains constant, decreases or
increases). If interest rate rises, bond prices fall and vice versa. If coupon
rate or interest rate remain constant, the rate of return will be equal to
YTM, whther it be beginning or end of the period.
$ 1,000.00 Payment $ 80.00
8.00%
1 nper 5
5
6.00% periodic rate 6.00%
market rate/m

($1,084.25)

$ 80.00

4
6%
($1,069.30)

$1,069.30
$1,084.25
6%
 1 year
RATE
ket rate/m

0 1 2 3 4
$ 80.00 $ 80.00 $ 80.00 $ 80.00

PV today $1,084.25
value at year1 $1,069.30
($1,084.25) $1,149.30
6%
 5
$ 1,080.00
A)

Maturity 1 2 3 4
Spot Rate 5.00% 5.40% 5.70% 5.90%
DF 0.9524 0.9002 0.8468 0.7951

B) Par value $ 1,000.00

1) 5%, 2 year bond

r 5.40% Coupon rate 5%
year 2 nper 2
m 1
Payment $ 50.00
PV ($992.60)

2) 5%, 5 year bond

r 6% Coupon rate 5%
year 5 nper 5
 m 1
Payment $ 50.00
PV ($957.88)

3) 10%, 5 year bond

r 6% Coupon rate 10%

year 5 nper 5
m 1
Payment $ 100.00
PV ($1,168.49)
 5
6.00%
0.7473

0 1 2
$ 50.00 $ 1,050.00
$992.60

0 1 2
$ 50.00 $ 50.00
 $957.88

0 1 2
$ 100.00 $ 100.00
$1,168.49
 3 4 5
$ 50.00 $ 50.00 $ 1,050.00
 3 4 5
$ 100.00 $ 100.00 $ 1,100.00
r1
r2

One year interest rate in one year time 1f1

The expected one year interest rate in one

year's time is 7.0095%
 5%
6%

7.0095%
m 60
y 2
r 5.90% 0.492%
payment 617.16

PV ($31,999.86) ($31,999.86) principle interst balance

1 $31,999.86 $157.33 $459.83
2 $31,540.03 $155.07 $462.09
3 $31,077.94 $152.80 $464.36
4 $30,613.58 $150.52 $466.64
5 $30,146.94 $148.22 $468.94
6 $29,678.00 $145.92 $471.24
7 $29,206.76 $143.60 $473.56
8 $28,733.20 $141.27 $475.89
9 $28,257.31 $138.93 $478.23
10 $27,779.08 $136.58 $480.58
11 $27,298.50 $134.22 $482.94
12 $26,815.56 $131.84 $485.32
13 $26,330.24 $129.46 $487.70
14 $25,842.54 $127.06 $490.10
15 $25,352.44 $124.65 $492.51
16 $24,859.93 $122.23 $494.93
17 $24,364.99 $119.79 $497.37
18 $23,867.63 $117.35 $499.81
19 $23,367.82 $114.89 $502.27
20 $22,865.55 $112.42 $504.74
21 $22,360.81 $109.94 $507.22
22 $21,853.59 $107.45 $509.71
23 $21,343.88 $104.94 $512.22
24 $20,831.66 $102.42 $514.74
25 $20,316.92 $99.89 $517.27
26 $19,799.65 $97.35 $519.81
27 $19,279.84 $94.79 $522.37
28 $18,757.47 $92.22 $524.94
29 $18,232.54 $89.64 $527.52
30 $17,705.02 $87.05 $530.11
31 $17,174.91 $84.44 $532.72
32 $16,642.20 $81.82 $535.34
33 $16,106.86 $79.19 $537.97
34 $15,568.89 $76.55 $540.61
35 $15,028.28 $73.89 $543.27
36 $14,485.01 $71.22 $545.94
37 $13,939.07 $68.53 $548.63
38 $13,390.44 $65.84 $551.32
39 $12,839.12 $63.13 $554.03
40 $12,285.08 $60.40 $556.76
41 $11,728.32 $57.66 $559.50
42 $11,168.83 $54.91 $562.25
43 $10,606.58 $52.15 $565.01
44 $10,041.57 $49.37 $567.79
45 $9,473.78 $46.58 $570.58
46 $8,903.20 $43.77 $573.39
47 $8,329.81 $40.95 $576.21
48 $7,753.61 $38.12 $579.04
49 $7,174.57 $35.27 $581.89
50 $6,592.69 $32.41 $584.75
51 $6,007.94 $29.54 $587.62
52 $5,420.32 $26.65 $590.51
53 $4,829.81 $23.75 $593.41
54 $4,236.40 $20.83 $596.33
55 $3,640.06 $17.90 $599.26
56 $3,040.80 $14.95 $602.21
57 $2,438.59 $11.99 $605.17
58 $1,833.42 $9.01 $608.15
59 $1,225.28 $6.02 $611.14
60 $614.14 $3.02 $614.14
60 $0.00