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ADM2350- Final Exam Guide - Comprehensive Notes for the exam ( 46 pages long!)

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School
University of Ottawa
Department
Administration
Course
ADM 2350
Professor
Anna Dodonova

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Document Summary

Ytm is the rate of interest that one will earn if he/she buys the bond and keep it until maturity. Bond price with annual coupon is given by: Example 1: you are thinking about buying a 4% coupon 15 year bond with annual coupon payments. Solution: today i will not pay more than: = =415. 1863+481. 0171=896. 2034. Next year i will not pay more than: = =395. 9456+505. 0680=901. 0136. Example 2: you are thinking about buying a 4% coupon 15 year bond with semiannual coupon payments. The yield to maturity (ytm) for this bond is 5%. Since p (. 3486) < face value () this bond will sell at discount. When you buy a bond your expected total return is equal to ytm. So, ytm=cgy+cy or the total expected return (ytm) comes from 2 sources: change in bond"s price and coupon payments. Example 3: find current yield for the bond in example 1. Example 4: find capital gains yield for the bond in example 1.

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Related Questions

2. What would be the initial offering price for the following bonds ( assume semiannual compounding)?
a. A 15- year zero- coupon bond with a yield to maturity ( YTM) of 12 percent
b. A 20- year zero- coupon bond with a YTM of 10 percent

3. Why does the present value equation appear to be more useful for the bond investor than for the common stock investor?

4. What are the important assumptions made when you calculate the promised yield to maturity? What are the assumptions when calculating promised YTC?

Please answer questions 7 to 11 with work, thank you!


7) Cohen has issued a bond with the following characteristics: Par: $1,000; Time to maturity: 15 years; Coupon rate: 7%; Semiannual payment. What is the price of the bond if the YTM is 9%?

8) The Pane bond has 11.5 years to maturity, a YTM of 7.6%, and a current price of $1,060. The bond makes semiannual payments. What is the coupon rate on this bond?

9) What is the inflation rate if nominal return is 14% and real return is 10%?

10) Jay, Inc. and Nic Corp. both have 7% coupon bonds outstanding with semiannual payments and both are priced at par value. The Jay, Inc. bond has 2 years to maturity, while the Nic Corp. bond has 15 years to maturity. If interest rate suddenly rises from 7% to 9%, what is the percentage change in the price of these bonds? If interest rate suddenly decreases by 2%, what is the percentage change in the price of these bonds?

11. You purchase a bond with an invoice price of $950. The bond has a coupon rate of 6.8%, and there are 2 months to the next semiannual coupon date. What is the clean price of the bond?

Assume that you wish to purchase a bond with a 30-year maturity, an annual coupon rate of 10 percent, a face value of $1,000, and semiannual interest payments. If you require a 9 percent nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?