1. Consider a coupon bond that has a $1,000 par value and a coupon rate of 10%. The bond is currently selling for $1,235 and has 8 years to maturity. What is the bond’s yield to maturity?
2. You are willing to pay $14,412 now to purchase a consol bond which will pay you and your heirs $1,225 each year, starting at the end of this year. If your required rate of return does not change, how much would you be willing to pay if this were a 20-year, annual payment, ordinary annuity instead of a perpetuity?
3. Assume you just deposited $1,000 into a bank account. The current real interest rate is 2% and inflation is expected to be 6% over the next year. What nominal interest rate would you require from the bank over the next year? How much money will you have at the end of one year? If you are saving to buy a stereo that currently sells for $1,050, will you have enough to buy it?
4. Calculate the duration of a $1,000 6% coupon bond with three years to maturity. Assume that all market interest rates are 7%.
5. Consider the bond in the previous question. Calculate the expected price change if interest rates drop to 6.75% using the duration approximation. Calculate the actual price change using discounted cash flow.