SOLUTIONS BOND PRACTICE SET

1. A coupon rate of 9% means the total annual payment is $90.

a. Current price is the present value of all coupon payments plus present value of the
face value.
1
1
(1.068) 6 1000
PV coupons 90 431.65 ; PV face value (1.068) 6 673.86
.068

Price = sum of present values = $1,105.51

N = 6, I = 6.8, PMT = 90, FV = 1000; Compute PV = $1,105.51

b. The timeline should look like this:

N=6
I = 6.8% 0 1 2 3 4 5 6
CPT PV 90 90 90 90 90 90
Price = 1,105.51 1000

2. All three bonds make annual coupon payments of 60. They have the same YTM but different
maturities.
a. Compute the prices using the formula above, or your financial calculator:

N PMT I FV CPT PV
Bond A 1 60 3.8% 1,021.19
1000
Bond B 5 60 3.8% 1,098.49
1000
Bond C 15 60 3.8% 1,248.06
1000
b. Compute the prices using the formula above, or your financial calculator:

N PMT FV PV at 5% PV at 10%
Bond A 1 60 1000 1,009.52 963.63
Bond B 5 60 1000 1,043.29 848.36
Bond C 15 60 1000 1,103.79 695.75

c. Your graph of the prices of the three bonds at different yields should look something
like this:

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 $1,300

$1,200

$1,100

$1,000

$900

$800 Bond A
Bond B
$700
Bond C
$600
0% 2% 4% 6% 8% 10% 12%

d. The relationship between time to maturity and sensitivity to rate fluctuations appears
to be this: The prices of bonds with longer maturities are more sensitive changes in
yield. That is, for longer maturities, there is a larger change in price for any given
change in rate.

3. The price of the bond ($1,349.96) is the sum of the present values of the coupon payments
and the face value. You can use the bond price formula and solve for the coupon payment.
Since this is a semiannual bond, you must double the number of years to find the number of
periods, and use half the yield to maturity for the rate per semiannual period. The coupon
payment occurs semiannually, so the total coupon amount per year is two times the payment.
Use this figure to compute the percent coupon rate on the $1000 face value, as shown below:
1
1
(1.02015) 22
1349.96 PMT 1000
; PMT = 40
.02015 (1.02015) 22


A semiannual payment of $40 means a total annual coupon amount of $80, for a coupon
rate of 8%.

On your calculator:
N = 2x11=22; I = x 4.03% = 2.015; PV = -1349.96; FV = 1000; Compute PMT = 40.
Coupon rate = annual payment / 1000 = 80/1000 = 8%.

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4. A zero coupon bond makes no periodic payments, so its price is equal to the present value of
the face value. You must use semiannual compounding in this case, however. If the bond has
nine years to maturity, there are 9 2 = 18 periods. The price is equal to the face value
discounted 18 periods at the periodic rate, so you can solve for the periodic rate:

Face value 1000

Price 493.63
(1 r )18
(1 r )18

N = 18, PV = 493.63, PMT = 0, FV = 1000; Compute I = 4%

Thus, the periodic rate per semiannual period is 4%.

Yield to maturity is expressed as an APR. Therefore, the YTM = 2 4% = 8%.

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