Problem 1

A)
Coupon rate 4.75%
Par value 100
No of years 10

1) If Price 100
then YTM 4.75% (When Price of a bond is equal to its par value, then

2) If price 99

PERIOD
0
1
2
3
4
5
6
7
8
9
10

IRR(YTM) =

3) If Price 101

PERIOD
0
1
2
3
4
5
 6
7
8
9
10

IRR(YTM) =

B)
Coupon rate 4.75%
Par value 100
No of years 8
YTM 3%

PERIOD
1
2
3
4
5
6
7
8

PRESENT VALUE
 YTM= Yield To Maturity

ual to its par value, then coupon rate = YTM)

CASH
FLOWS FOR
CALCULATI
ON OF IRR
($99.00)
$4.75
$4.75
$4.75
$4.75
$4.75
$4.75
$4.75
$4.75
$4.75
$104.75

4.88%

CASH
FLOWS FOR
CALCULATI
ON OF IRR
($101.00)
$4.75
$4.75
$4.75
$4.75
$4.75
 $4.75
$4.75
$4.75
$4.75
$104.75

4.62%

CASH
FLOWS FOR
CALCULATI
ON OF IRR
$4.75
$4.75
$4.75
$4.75
$4.75
$4.75
$4.75
$104.75

($112.28)
PROBLEM 2

A)
BOND-A BOND-B

Coupon rate 9%
Par value $1,000.00
No of years 5
YTM 8%
Coupon Payment $90.00

Compounded semi annually

Coupon rate 4.50%

Par value $1,000.00
No of period 10
YTM 4%
Coupon Payment $45.00
Price Of Bond ($1,040.55)

B)

Coupon rate 8%
Par value $1,000.00
No of years 10
Coupon Payment $80.00
Price Of Bond $990.00

CASH
FLOWS FOR
CALCULATI
PERIOD ON OF IRR
0 ($990.00)
1 $80.00
2 $80.00
3 $80.00
4 $80.00
5 $80.00
6 $80.00
7 $80.00
8 $80.00
9 $80.00
 10 $1,080.00

IRR(YTM) = 8.15%

The Yield To Maturity implied by the Nationaliste Eurobond is more

than the Yield To Maturity implied by 8% "bond-equivalent yield" of
the Patriot semi-annual coupon bond (Bond B). Therefore , Ms. Alumn
should invest in Nationaliste Eurobond.
 BOND-C
ZERO COUPON BOND
Coupon rate 8% YTM 8%
Par value $1,000.00 Par value $1,000.00
No of years 10 No of years 10
YTM 8% Price Of Bond ($463.19)
Coupon Payment $80.00

Compounded semi annually

Coupon rate 4.00%

Par value $1,000.00
No of period 20
YTM 4%
Coupon Payment $40.00
Price Of Bond ($1,000.00)
Problem 3
A)
Interest Rate 9%
No of Years 20
Annual Instalment $25,000.00
Amount of Loan ($228,213.64)

Total Principal $228,213.64

B)
Interest Rate 9%
No of Years 20

Annual Instalment Period Annuity Table Value

$25,000.00 1to5 3.8897
$30,000.00 6to10 6.4177
$35,000.00 11to15 8.0607
 $40,000.00 16to20 9.1285
Total Amount Of Loan

Total Principal $273,299.50

Year Instalment Interest Principal Repayment Balance Principal Amount

1 $25,000.00 $20,539.23 $4,460.77 $223,752.87

2 $25,000.00 $20,137.76 $4,862.24 $218,890.63
3 $25,000.00 $19,700.16 $5,299.84 $213,590.78
4 $25,000.00 $19,223.17 $5,776.83 $207,813.95
5 $25,000.00 $18,703.26 $6,296.74 $201,517.21
6 $25,000.00 $18,136.55 $6,863.45 $194,653.76
7 $25,000.00 $17,518.84 $7,481.16 $187,172.59
8 $25,000.00 $16,845.53 $8,154.47 $179,018.13
9 $25,000.00 $16,111.63 $8,888.37 $170,129.76
10 $25,000.00 $15,311.68 $9,688.32 $160,441.44
11 $25,000.00 $14,439.73 $10,560.27 $149,881.17
12 $25,000.00 $13,489.31 $11,510.69 $138,370.47
13 $25,000.00 $12,453.34 $12,546.66 $125,823.82
14 $25,000.00 $11,324.14 $13,675.86 $112,147.96
15 $25,000.00 $10,093.32 $14,906.68 $97,241.28
16 $25,000.00 $8,751.71 $16,248.29 $80,992.99
17 $25,000.00 $7,289.37 $17,710.63 $63,282.36
18 $25,000.00 $5,695.41 $19,304.59 $43,977.77
19 $25,000.00 $3,958.00 $21,042.00 $22,935.77
20 $25,000.00 $2,064.22 $22,935.78 -$0.01

TOTAL $500,000.00 $271,786.35 $228,213.65

Present Value (Using Annuity Table)

$97,242.50
$75,840.00
$57,505.00
 $42,712.00
$273,299.50
Problem 4
Price of Bond $10,000,000.00
A)
rate of interest
A 10
B 9.72

B)

no. of times
rate of interest compounded annually
Bond with 10% annual
rate of interest 10 1

Bond with 9.72%

annual rate of
interest,compounded
monthly 9.72 12

C) Consider two bonds A and B both having  Rs 100 of present value having maturity of two years.
A is a normal bond with coupon rate 10%
B is a zero coupon bond having effective yield of 10% per year on maturity.

For bond B,
At the end of two years, the amount paid back is 100*(1.1^2) =  Rs 121

For bond A, the amount that can be generated in two years is,
At the end of first year,

we get 10% of 100 = Rs 10. We invest this again at the prevailing rate in the market for the second ye
assume that it is 'r' . So now Rs 10 is invested at 'r' at the end of the first year.

In the second year,when the bond matures, we will get a coupon of Rs 10 and the par value is repaid
Rs 100. Also we will have the amount which was invested in the previous year which is 10*(1+r)
Hence, when the bond a matures in two years , the total amount that we will be having is,
10(1+r)+10+ 100.

Lets equate the amounts received by bond  A and B after two years,
 10(1+r)+10+ 100 = 121
hence r = 0.1 or 10%.

Now if 'r' in the second year goes below 10%, the amount from bond A will become less than amoun

Thus we see that a normal bond runs this risk of generating lower value as compared to a zero coupo
case the market rates fluctuate during the tenure and become lower than the assured yield on the ze
bond which is 10% in the above case.
To counter this risk, a yield of  +50 basis point may be desired.(market risk premium)
 no. of times compounded annually effective annual yield to maturity
1 10
12 10.1649335710808

future
required
effective annual yield to maturity maturity period payment

10 15 41772482

10.1649335710808 15 42721909

present value having maturity of two years.

% per year on maturity.

*(1.1^2) =  Rs 121

he prevailing rate in the market for the second year. Lets

t the end of the first year.

et a coupon of Rs 10 and the par value is repaid which is

ested in the previous year which is 10*(1+r)
otal amount that we will be having is,

after two years,

 ount from bond A will become less than amount from bond B.

erating lower value as compared to a zero coupon bond in

d become lower than the assured yield on the zero coupon

e desired.(market risk premium)