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A 6% coupon bond pays interest annually, matures in 7 years, and has a principal of $1000.
(a) Assuming a discount rate of 8%, what is the price of this bond?
(b) Assuming a discount rate of 8.5%, what is the price of this bond?
(c) Assuming a discount rate of 7.5%, what is the price of this bond?
(d) What is the duration of this bond, assuming that the price is the one you calculated in part (a)?
(e) If the yield changes by 100 basis points, from 8% to 7%, what would be the approximate % price change using the calculated duration from part (d)?
(f) What is the actual % price change given the yield change in (e)?
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You must evaluate a proposed spectrometer for the R&D department. The base price is $110,000, and it would cost another $27,500 to modify the equipment for special use by the firm. What are the project's annual cash flows in Years 1, 2, and 3? Round ..
The spot price of a market index is $1,085. A 9-month forward contract on this index is priced at $1,170. What is the profit or loss to a short position if the spot price of the market index is $1,095 on the expiration date?
A Treasury bond that matures in 10 years has a yield of 6%. A 10-year corporate bond has a yield of 9%. Assume that the liquidity premium on the corporate bond is 0.5%. What is the default risk premium on the corporate bond?
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