FNCE90060 2015 SM1 WS 05 1 
Financial Management FNCE90060
Semester 1, 2015
Workshop 5
6-6.
Suppose a 10-year, $1000 bond with an 8% coupon rate and semiannual coupons is trading for a price of $1034.74.
a. What is the bond’s yield to maturity (expressed as an APR with semiannual compounding)? b. If the bond’s yield to maturity changes to 9% APR, what will the bond’s price be?
6-10. Suppose a seven-year, $1000 bond with an 8% coupon rate and semiannual coupons is trading with a yield to maturity of 6.75%.
a. Is this bond currently trading at a discount, at par, or at a premium? Explain.
b. If the yield to maturity of the bond rises to 7% (APR with semiannual compounding), what price will the bond trade for?
6-12. Suppose you purchase a 10-year bond with 6% annual coupons. You hold the bond for four years, and sell it immediately after receiving the fourth coupon. If the bond’s yield to maturity was 5% when you purchased and sold the bond,
a. What cash flows will you pay and receive from your investment in the bond per
$100 face value?
b. What is the internal rate of return of your investment?
6-15. Suppose you purchase a 30-year Treasury bond with a 5% annual coupon, initially trading at par. In 10 years’ time, the bond’s yield to maturity has risen to 7% (EAR).
a. If you sell the bond now, what internal rate of return will you have earned on your investment in the bond?
b. If instead you hold the bond to maturity, what internal rate of return will you earn on your investment in the bond?
c. Is comparing the IRRs in (a) versus (b) a useful way to evaluate the decision to sell the bond? Explain.
For Problems 17–18, assume zero-coupon yields on default-free securities are as summarized in the following table:
6-17. What is the price today of a two-year, default-free security with a face value of $1000 and an annual coupon rate of 6%? Does this bond trade at a discount, at par, or at a premium? 6-18. What is the price of a five-year, zero-coupon, default-free security with a face value
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Semester 1, 2015
Workshop 5
6-6.
Suppose a 10-year, $1000 bond with an 8% coupon rate and semiannual coupons is trading for a price of $1034.74.
a. What is the bond’s yield to maturity (expressed as an APR with semiannual compounding)? b. If the bond’s yield to maturity changes to 9% APR, what will the bond’s price be?
6-10. Suppose a seven-year, $1000 bond with an 8% coupon rate and semiannual coupons is trading with a yield to maturity of 6.75%.
a. Is this bond currently trading at a discount, at par, or at a premium? Explain.
b. If the yield to maturity of the bond rises to 7% (APR with semiannual compounding), what price will the bond trade for?
6-12. Suppose you purchase a 10-year bond with 6% annual coupons. You hold the bond for four years, and sell it immediately after receiving the fourth coupon. If the bond’s yield to maturity was 5% when you purchased and sold the bond,
a. What cash flows will you pay and receive from your investment in the bond per
$100 face value?
b. What is the internal rate of return of your investment?
6-15. Suppose you purchase a 30-year Treasury bond with a 5% annual coupon, initially trading at par. In 10 years’ time, the bond’s yield to maturity has risen to 7% (EAR).
a. If you sell the bond now, what internal rate of return will you have earned on your investment in the bond?
b. If instead you hold the bond to maturity, what internal rate of return will you earn on your investment in the bond?
c. Is comparing the IRRs in (a) versus (b) a useful way to evaluate the decision to sell the bond? Explain.
For Problems 17–18, assume zero-coupon yields on default-free securities are as summarized in the following table:
6-17. What is the price today of a two-year, default-free security with a face value of $1000 and an annual coupon rate of 6%? Does this bond trade at a discount, at par, or at a premium? 6-18. What is the price of a five-year, zero-coupon, default-free security with a face value
of