FIN254

Assignment#5 (Based on Chapter 7)

1. If a T-bill is currently paying 7.5% interest rate and average increase in price level (inflation) is 3.5%, !at is t!e appro"i#ate real rate of interest$ T!e e"act real rate$ %. &uppose t!e real rate is '.5% and t!e average increase in price level (inflation) is 5.5%. (!at rate ould you e"pect to see in a T-)ill$ 3. *n invest#ent offers 13% total return over t!e co#ing year. +r. *nondo t!in,s t!e total real return on t!is invest#ent ill be only -%. (!at does +r. *nondo believe t!e inflation rate ill be over t!e ne"t year$ '. &uppose your &.*/0.*1 2*T3* paid a 13.5% total return last year. If t!e inflation rate as '.-%, !at as your real return$ 5. )ond 4 is a pre#iu# bond #a,ing annual pay#ents. T!e bond pays 15% coupon, !as a discount rate (1T+) of 7% and also !as 15 years to #aturity. )ond 1 is a discount bond #a,ing annual pay#ents. T!is bond !as 7% coupon, !as a 1T+ of 15% and also !as 15 years to #aturity. If interest rates re#ain unc!anged !at do you t!in, t!e price of t!ese bonds ould be no $ % years fro# no $ In 5 1ears$ In 7 years$ In 15 years$ In 13 years$ Illustrate your ans ers by grap!ing bond prices versus ti#e to #aturity. 6. )anglalin, !as 7.6% coupon bonds on t!e #ar,et it! 15 years to #aturity. T!e bonds #a,e se#iannual pay#ents and currently sell for 7%.5% of par. (!at is current yield on t!e bonds$ T!e 1T+$ T!e effective annual yield$ 7. /ort! &out! 8niversity ants to issue ne 15-year- bonds for so#e #uc! needed e"pansion pro9ects. T!e co#pany currently !as -% coupon bonds in t!e #ar,et t!at sell for T: 1555, #a,e se#iannual pay#ents and #ature in 15 years. (!at coupon rate s!ould t!e university set on its ne bonds if it ants to sell t!e# at par$ -. &uppose, you purc!ase a bond it! an invoice price (dirty price) of T, 1155. T!e bond !as a coupon rate of 7.%% and t!ere are four #ont!s to t!e ne"t se#iannual coupon date. (!at is t!e clean price of t!e bond$

Due Date: 26th November, 2013 (Tuesday) Or next available lass in ase o! hartal"

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