1. BLB Ltd has just issued a “coupon growth bond” with the following terms. Each bond’s face value is $1,000 and the bonds will mature in 5 years’ time. Coupons will be paid on an annual basis at the end of each year. The first year’s coupon will be $100 which will then grow at an annual rate of 10% until the bonds mature. If the bond’s yield to maturity is 8% per annum, its price today should be closest to: a) $972. b) $1,080. c) $1,161. d) $1,275.
2. Consider a five-year bond with a face value of $1,000 paying annual coupons at a rate of 12% which has a current yield to maturity of 10%. If all interest rates remain unchanged, one year from today the price of this bond: a) Will be higher. b) Will be lower. c) Will be the same. d) Cannot be determined without additional information.
3. Your favorite aunty has finally agreed to contribute towards funding your retirement. Specifically, she will start with a contribution of $6,000 today (that is, end of year 0) but this amount will then decline at a constant rate of 3% p.a. over the foreseeable future. If the interest rate appropriate for valuing your aunty’s contribution is 12% p.a. its present value today is closest to: a) $38,800. b) $44,800. c) $56,000. d) $70,667.