econ 162

1. (43 points) Consider a coupon bond that pays $350 every year and repays its principal amount of $5,000 at the end of four years. If the rate of discount is 6 percent, what is the present value of the bond?

N=4 PMT=350 FV=5000 I/Y=6% PV?        Present value=$2747.68

              On September 1, 2012, Al buys a bond for $15,000 that makes coupon payments of $750 after each of the following three years and returns its principal of $15,000 at the end of the three years. In other words, it is a standard coupon bond with a 5 percent annual interest rate making payments once each year.

 

On September 1, 2013, Al receives his first coupon payment of $750. At that time, the market interest rate on bonds like Al’s has risen to 6 percent. Al sells his bond to Biff at that time, for a price equal to the present value of the bond’s payments.

a.	How much does Biff pay Al for the bond?
b.	Calculate Al’s current yield, capital-gains yield, and total return for the year.

On September 1, 2014, Biff receives a coupon payment of $750. The market interest rate on bonds like his remains 6 percent. Biff sells his bond to Cass at that time, for a price equal to the present value of the bond’s payments.

c.	How much does Cass pay Biff for the bond?
d.	Calculate Biff’s current yield, capital-gains yield, and total return for the year.

On September 1, 2015, Cass receives a coupon payment of $750 and the principal of $15,000. Over the course of the year (between September 1, 2014, and September 1, 2015), the market interest rate on bonds like his rose to 7 percent. But Cass decided to keep the bond.

e.	What is Cass’s total return for the year?