Question

Problem 9.02

Part A: 86:12 Part B: 105:28 Part C: 92:02 Part D: 9:16 NOTE: As a check (before you put them into Polylearn), take your answers and convert them back into the 32" quotes shown above. If you did it correctly (both ways) then you should get the same quoted price back. Problem 9.02 (i.e. Day 9, Problem 02). Consider a 4 year zero coupon bond priced such that its YTM is 7% per year. Assume the face value is $1000.

Answer 1

Part A

Dollar price of bond = Face value/ (1+YTM)^t

where Face value is 1000, YTM = 0.07 or 7%, t=4

Hence price of bond=1000/(1.07)^4

= 762.8952

Part B

Assuming that Part B deals with finding dollar price of bond after 1 year, here are the details

Dollar price of bond = Face value/ (1+YTM)^t

where Face value is 1000, YTM = 0.05 or 5%, t=4

Hence price of bond=1000/(1.05)^4

= 822.7025

Part C

Since the question, doesn't mention any dividend between t0 and t1, the formula for holding period return (HPR) here is as follows :

= (Bond value at t1- Bond value at t0)/ Bond value at t0

= (822.7025- 762.8952 )/ 762.8952

=0.0783 or 7.83%

Part C second part of question :

The answer to part C is not equal to 5% or 7 % here since the person holding the bond is getting a return higher than the prevalent interest rates in the market i.e during the holding period, the person is earning interest rate at 7% when the market rates have declined to 5%, hence the effective return on holding this bond will always be higher than the nominal interest rates.

Please note, as per HOMEWORKLIB RULES, we cannot answer more than 4 sub parts to a question. 4 of them (part C has 2 sub parts) have been answered above.