R M 410: Financial Mathematics

Homework #9
Due Tue, Nov 14, 2017

15. Questions 610 of Homework 8

6. A $1000 par value bond has 8% semiannual coupons and is redeemable for $1100 on
any coupon date from the 11th coupon through the 20th coupon, for $1150 on any
coupon date from the 21st coupon through the 30th coupon, and for $1200 on any
coupon date from the 31st coupon through the 40th coupon. What is the highest price
that an investor can pay for the bond and still be certain of a yield of 7% compounded
semiannually. (Answer: $1113.50)

7. Vincent purchased a 10-year par value bond with semiannual coupons at a nominal
annual rate of 5.6% compounded semiannually for a price of $1130 The bond can be
called at its par value of $1200 on any coupon date starting at the end of 5 years.
What is the minimum yield that Vincent can receive, expressed as a nominal annual
rate of interest convertible semiannually? (Answer 6.4%)

8. A three-year $1000 par-value bond with 4% annual coupons sells for $990. A two-year
$1000 par-value bond with 3% annual coupons sells for $988. A one-year zero-coupon
bond redeemable for $1000 sells for $974. Determine the spot rates, s1 , s2 , and s3 .
(Answer: 2.6694%, 3.6476%, 4.4062%)

9. Consider the following table of 4% par-value bonds having annual coupons:

Term Yield
1 year 1.5%
2 years 2.8%
3 years 3.6%

(a) Determine the spot rates for investments of one year, two years, and three years.
(Answer: 1.5%, 2.8260%, 3.6503%) (Note: The answers are the same regardless
of the par value, so you may assume a convenient par value such as $1000.)
(b) Determine the zero, one, and two year forward rates. (Answer: 1.5%, 4.17%,
5.32%)

10. You are given the following information about two annual coupon bonds that will
mature in four years at par:
Bond A Bond B
Par value $750 $1,000
Annual coupon rate 4% 2%
Price $500 $700

1
 Determine the four-year spot rate. (Answer: 8.06%)

11. A $1000 par-value bond with 10% annual coupons matures at par in 2 years. The
one-year spot rate is 9% and the one-year forward rate is 10.5%. what is the yield rate
on this bond? (Answer: 9.71%)