2.

Example: changes in required yield. Using your calculator, compute the value of a $1,000 par value bond, with a three year life, paying 6% semiannual coupons to an investor with a required rate of return of: 3%, 6%, and 12%.

At I/Y = 3%/2; n = 3*2; FV = 1000; PMT = 60/2; compute PV = -1,085.458

At I/Y = 6%/2; n = 3*2; FV = 1000; PMT = 60/2; compute PV = -1,000.000

At I/Y = 12%/2; n = 3*2; FV = 1000; PMT = 60/2; compute PV = - 852.480

g: Explain how the price of a bond changes as the bond approaches its maturity date and compute the change in value that is attributable to the passage of time.

A bond’s value can differ substantially from its maturity value prior to maturity. However, regardless of its required yield, the price will converge toward maturity value as maturity approaches. Returning to our $1,000 par value bond, with a three-year life, paying 6% semi-annual coupons. Here we calculate the bond values using required yields of 3, 6, and 12% as the bond approaches maturity.

h: Compute the value of a zero-coupon bond.

You find the price or market value of a zero coupon bond just like you do a coupon-bearing security, except, of course, you ignore the coupon component of the equation. The only cash flow is recovery of par value at maturity. Thus the price or market value of a zero coupon bond is simply the present value of the bond's par value.

Bond value = M / (1 + i/m)n*m

Example: A zero coupon bond. Suppose we have a 10-year, $1,000 par value, zero coupon bond. To find the value of this bond given its being price to yield 8% (compounded semiannually), you'd do the following:

Bond value = 1000 / (1 + .08/2)10*2 = 456.39

On your financing calculator, N = 10*2 = 20, FV = 1000, I/Y = 8/24; CPT PV = 456.39 (ignore the sign).

The difference between the $456.39 and the par value ($1000) is the amount of interest that will be earned over the 10-year life of the issue.

i: Compute the dirty price of a bond, accrued interest, and clean price of a bond that is between coupon payments.

Example: changes in required yield. Using your calculator, compute the value of a $1,000 par value bond, with a three year life, paying 6% semiannual coupons to an investor with a required rate of return of: 3%, 6%, and 12%.

At I/Y = 3%/2; n = 3*2; FV = 1000; PMT = 60/2; compute PV = -1,085.458

At I/Y = 6%/2; n = 3*2; FV = 1000; PMT = 60/2; compute PV = -1,000.000

At I/Y = 12%/2; n = 3*2; FV = 1000; PMT = 60/2; compute PV = - 852.480

g: Explain how the price of a bond changes as the bond approaches its maturity date and compute the change in value that is attributable to the passage of time.

A bond’s value can differ substantially from its maturity value prior to maturity. However, regardless of its required yield, the price will converge toward maturity value as maturity approaches. Returning to our $1,000 par value bond, with a three-year life, paying 6% semi-annual coupons. Here we calculate the bond values using required yields of 3, 6, and 12% as the bond approaches maturity.

h: Compute the value of a zero-coupon bond.

You find the price or market value of a zero coupon bond just like you do a coupon-bearing security, except, of course, you ignore the coupon component of the equation. The only cash flow is recovery of par value at maturity. Thus the price or market value of a zero coupon bond is simply the present value of the bond's par value.

Bond value = M / (1 + i/m)n*m

Example: A zero coupon bond. Suppose we have a 10-year, $1,000 par value, zero coupon bond. To find the value of this bond given its being price to yield 8% (compounded semiannually), you'd do the following:

Bond value = 1000 / (1 + .08/2)10*2 = 456.39

On your financing calculator, N = 10*2 = 20, FV = 1000, I/Y = 8/24; CPT PV = 456.39 (ignore the sign).

The difference between the $456.39 and the par value ($1000) is the amount of interest that will be earned over the 10-year life of the issue.

i: Compute the dirty price of a bond, accrued interest, and clean price of a bond that is between coupon payments.