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A. Today (T=0), an investor purchased a seven year bond with an 8.0% coupon for $105,500....

  1. A. Today (T=0), an investor purchased a seven year bond with an 8.0% coupon for $105,500. The bond has a face value of $100,000. The bond’s yield to maturity is closest to:

    1. 5.5%

    2. 6.7%

    3. 7.0%

    4. 8.0%

    5. 11.0 %

      B. Today (T=0), an investor purchased a nine year bond with an 8.0% coupon for $9,680. The bond has a face value of $10,000. In six months (T=0.5) interest rates have increased by 1.0% and the investor decides to sell the bond immediately after receiving the first coupon payment. What is the investor’s total gain (loss) on the bond? HINT: Total Gain (Loss) = Price Change in Bond + Coupon

      A. ($583) B. ($183) C. ($150) D. $190 E. $990

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2 Calculation of Yield to maturity: Face value Coupon rate Current Price Years to Maturity Annual Coupon Cash flow to investor will be as follows: Year Cash flow $100,000 8.00% $105,500 years 8,000.00 D4 D5 10 ($105,500$8,000 $8,000 $8,000 $8,000 $8,000 8,000 $108,000 12 13 14 Yield to maturity is the rate at which if future NPV to Investor will be zero Let r be the yield to maturity then, NPV--105500+ 8000 8000 108000 16 17 18 19 108000 十(1+r) 8000 8000 0-105500+_+_+ 21 By solving above equation, yield to maturity r can be found Hit and trial method can be used to find the solution of above equation. 23 24 Rate(nper,pmt,PV, [fvl,type) function of excel can be used to find the yield to maturity as follows: NPER PMT 26 27 $8,000 ($105,500.00 100,000 FV 30 31 32 6.98% RATE(D26,D27,D28,D29 Yield to maturit 6.98% Thus yield to maturity is Hence Yield to maturity is 7% ie. 3rd option 35

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