FINE 6050 - Exam 1 & 2 - Study Guide.

1.) BOND & STOCK VALUATIONExample 1:What is the price of a $1,000 par, pure discount bond having six years left to maturity, andwhose YTM is 8.25%?FPV=Which Formula to Use?t(1+r)tHow to Work the Problem:PV = $1,000/(1+.0825)6PV = $621..50Question 1:How do you calculate the Pure Discount Bond's Yield to Maturity?FPV¿FFPV=t¿(1+r)=Answer 1-e?Can be derived fromttPV(1+r)1t(¿¿)−1Tr=¿tExample 2:The December 21, 1993, Wall Street Journal reports a oneyear, $10,000 par Treasury Bill‐sells for $9,654.38. Find this TBill's YTM?‐Which Formula to Use?YTM = rT = "Spot Rate"YTMT = [(F/PV)^(1/T)] -1How to Work the Problem:YTM = [($10,000/$9654.38)^1] 1= 3.58%‐Example 3:Find the term structure for these bonds:tPVYTM, rt194.06.38%289.505.70%385.255.46%481.255.33%For ExamplerT= (100/85.25)1/3-1 = 5.46%Question 2:What sort of bond makes periodic coupon payments, usually twice annually, and returns thepar value at maturity?Answer: The Level-Coupon Bond.Questions 3:What is the price of a Level-Coupon Bond?CCCFPV=++Answer 3:+...+12TT(1+r)(1+r)(1+r)(1+r)12TTExample 3 (cont.): Find the price of threeyear, 8% coupon bond, given the following yield curve,‐ Need the answer? 2937 tutors online. Answers in as fast as 15 minutes. trT16.38%25.70%35.46%45.33%NOTE: C = $0.08 X $1000 = $$1000PV=+++Answer:1233(1+0.0638)(1+0.0570)(1+0.0546)(1+0.0546) Need the answer?