Answer Happy

Problem 1: Find the fundamental price Roger's bond matures in 8 years, has a par value of $1,000, and makes an annual coupon payment of $50. The discount rate for the bond is 6.5%. What is the fundamental price of this bond? Keep four decimal places; that is, write 6.54% as 0.0654. Problem 2: Find the YTM - use approximation here! Why? Bond with face value F = $ 1000, coupon rate c= 10% paid semi-annually, maturity of n=2 years and traded at price Bo=800. What is the approximate yield to maturity if you want to buy the bond today? Problem 4: Find the YTM - no need for approximation here! You can find the exact YTM. Why? ABC bond has 10 years until maturity, face value of $4000, and a coupon rate of 8 percent payable annually. The bond sells today (end of year 9) for $4150, What is the yield to maturity? Keep 4 decimal places. (Hint: Don't use approximation here. Use the definition of YTM) Problem 4: On Chapter 4 Your friend is about to retire in four years from today. According to your financial plan for him, he needs $1,800 monthly until death. Assuming life expectancy of 20 years and interest rate 6%, how much your friend needs to have in his bank account today? Keep four decimal places in all computations Question 5 (conceptual): In one sentence for each concept, explain the difference between the following terms: interest rate (also known as market rate), coupon rate, discount rate, yield to maturity (YTM), rate of return, required return, expected return, average return. Question 6 (conceptual): What is the difference between YTM and interest rate/market rate? Hint: In the bond context, think of when do we use each concept? What will happen if they are the same?