TUTORIAL 7 – Discounted Cash Flow Valuation I

The bonds can be issues with fixed interest or variable rate interest, each of which has its advantages and there disadvantages.

How much would you pay for a security that pays you $500 every 4 months for the next 10 years if you require a return of 8% per year compounded monthly?

(b) Coupon and principal of the Regular Treasury bonds are fixed, therefore if the inflation rate increases in the forecasting future, investor will receive the same amount of coupon and principal with less real value and purchasing power.

What annual interest rate is needed to produce $200,000 after five years if only $100,000 is invested?

10. An investment of $1,000 today will grow to $1,100 in one year. What is the continuously compounded rate of return?

Answer: The Coupon Rate is a generally fixed and is known as the stated rate of a bond that determines the periodic interest payments. As stated in the textbook, the annual coupon dividen by the face value is called the coupon rate of the bond. The YTM rate of return anticipated on the bond if it is held until the maturity Date. YTM is considered a long-term bond yield expressed as an annual rate.

A person deposited $500 in a savings account that pays 5% annual interest that is compounded yearly. At the end of 10 years, how much money will be in the savings account? (Bluman, A. G. 2005, page 230).

The first kind of risk that could affect the bonds is credit risk. There is a chance that the bond could be defaulted, which means that the yield rate will decrease.

2. What is the difference between the coupon rate and the YTM of bonds? (10 pts)

Interest rate risk: When the interest rate goes up, the bond price will goes down.

The semi-annual compounded interest rate is 5.2% (a six-month discount rate of 5.2/2 = 2.6%). (15 points)

- Bonds carry interest which is also called Coupons that are paid to the bond holder (for using his money)

First we need to get the present value of the annuity for the 1,500 semiannual PMTs at year 14

All else equal, which bond’s price is more effected by a change in interest rates, a bond with a large coupon or a small coupon? Why?

Present Value" is the present-day value of a sum of money expected to be received at a future date calculated at a specified rate of interest. "Future