978-1133494683 Chapter 6 Solution Manual

Answers to End of Chapter Questions

1. $1,000 (1.02)28 = $1,741.02

Financial calculator solution

P/Y = 4

2. $20,000 (1.005)72 = $28,640.89

Financial calculator solution

P/Y = 12

1

in whole or in part.

4. Financial calculator solution

P/Y = 12

5. Present value = $6,800/(1.12)8 = $2,746.41

Financial calculator solution

6. With annual compounding: $250 (1.24)6 = $908.80;

Financial calculator solution

With monthly compounding: $250 (1.02)72 = $1,040.28

7. Future value = $9,000 (1.08)3 (1.05)8 = $16,750.52

Financial calculator solution

Step 1

Step 2

2

in whole or in part.

8. Part i): Annual growth rate (g): $150,000 (1+g)5 = $250,000 or g = 0.1076 or 10.76%

Financial calculator solution

Part ii)

9. Financial calculator solution

10. Premium bond because the coupon rate exceeds the market rate.

Financial calculator solution

11. Suppose that you buy the Treasury security at $10,000 par. If you strip the coupons, each equal to

$300, and the principal payment and sell them each as a zero coupon security, each would be

priced to yield the associated zero coupon rate. The price of each zero coupon security and

cumulative price would be:

3

in whole or in part.

87.743,10$

)03.1(

000,10

)03.1(

350

Price 20

20

1





t

t

12. Assuming that Lamar paid par for the bond, the par value is $2,800. The bond pays $98 in

semiannual interest.

Financial calculator solution

Brigg’s $2,800 investment returned $3,000.55, or $200.53 more than the price, for a +7.16% over

6 months, or 14.32% annually. He did well because interest rates fell during the 6 months.

13. The current price of the bond is $10,092.93 given the coupon rate of 6.5% and the market rate of

6%. The Macaulay’s duration is 3.804 semiannual periods or 1.902 years.

325 (1) + 325(2) + 325(3) + 10,325(4)

10,092.93

Duration of the zero coupon bond is 4 semiannual periods or 2 years. The durations di?er

15. a. zero duration

16. Both are correct. The mathematics calculates Macaulay’s duration as the weighted average of

17. Assume that the purchase price of the zero is $1,000. This means that its future value at maturity

4

in whole or in part.

53.000,3$

)03.1(

800,2

)03.1(

98

Price 19

19

1





t

t53.000,3$

)03.1(

800,2

)03.1(

98

Price 19

19

1





t

t

977,500

$9,620

Financial calculator solution

Future value of coupon payments

$10,000

Sell the bond aQer 2 years:

5

in whole or in part.

$10,000

Financial calculator solution

Future value of coupon payments

Sale Price

Total Return

The total return is higher in the second case because the holder assumes that he/she can sell the security for a

gain aQer two years. This gain increases the total return versus holding the security until maturity.

24. Expected total return:

Sale Price

Total Return

This return is low because the investor pays a premium for the security, rates are assumed to

increase aQer purchase, and the sale price is well below the purchase price.

25. Total return on Bondex Corp. shares (per share):

First 2 years:

0.015

If you can reinvest this at 9% (2.25% quarterly) over the last 3 years, the total future value of the

Financial calculator solution

Future value of dividends at end of Arst two years

Future value of dividends at the end of last three years

7

in whole or in part.

Next 3 years:

0.0225

Future value of dividends at end of last three years

25.0

Financial calculator solution

Total Return

8

in whole or in part.