Bonds

Question 1

What are coupon payments and face value?

Answer 1

• Coupon payments are regular payments
• Face value is amount to maturity
• e.g. 1k treasury bond
• > FV is 1k
• 9% semiannual coupon
• > PMT=APR/M * FV
• > 9/2*1000
• > 45 dollars every six months

Question 2

How much is paid when the bond is issued in the primary market?

Answer 2

• FV + Coupon payments
• its worth?
• value bond via
• > PV=PMT/r (1-1/1+r)^n) + FV/(1+r)^n
• Where R=
• > R=(1-EAR)^1/2 -1

-> R= APR/2

Question 3

Zero Coupon Bond

Answer 3

FV(1+R)^n

Question 4

Yield to maturity

Answer 4

R=YTM

• YTMapr = 2*R6months
• YTMear = (1+R6months)^2-1

Question 5

Bond prices

Answer 5

• > move in opposite direction to interest rates

- > bonds with a bigger n will be more sensitive to changes in interest rate than those with smaller n