Bonds and Interest Rates: Practice Problems, Assignments of Economics

Download Bonds and Interest Rates: Practice Problems and more Assignments Economics in PDF only on Docsity! Practice Problems 2 1. Disney has issued a corporate bond with the following characteristics Face Value: $1000 Term to maturity: 20 years Coupon Rate: 8% Semi-annual payments of coupon Calculate the price of the Disney bonds if the stated annual interest rate is: (a) 10% (b) 6% What is evident regarding the relationship between the price of bonds and the interest rate? 2. Suppose you had an opportunity to purchase a United States Senate seat from former Illinois Governor Rod Blagojevich. After much negotiation your best offer was a $120,000 bribe to the governor. The governor gives you a choice of taking $9,000 discount off the bribe if you pay the bribe in cold hard cash (preferably in bags with dollar signs on it), or you can pay $20,000 down now and make 24 fixed monthly payments of $4432.10. You have enough savings to pay the entire amount in cash if you want. Assume that you have an alternative of earning 1% per month in a savings account. Would you be better off paying the bribe upfront or by making the fixed monthly payments? Explain your reasoning. 3. What would the price be for a 3 month $1000 par value Treasury Bill (with no coupon) if the three month effective rate is 0.27%? What would be the price of the same Treasury bill if the three month effective rate was 1.75%? 4. A bond is sold for $923.14. The $1000 par value bond has 15 years to maturity and investors require a 10% yield on the bond. What is the coupon rate for the bond if the coupon is paid semi-annually?