BUS/ECON-2819 Corporate Finance I

Assignment 3

For problems 1 - 4 below, assume zero-coupon yields on default-free securities are as summarized in the following table:

Maturity (years)12345

Zero-coupon YTM_n4.00%4.30%4.50%4.70%4.80%

1. What is the price of a two-year, default-free security with a face value of $1000 and an annual coupon rate of 6%? Does this bond trade at a discount, at par, or at a premium?

2. What is the price of a five-year, zero-coupon, default-free security with a face value of $1000?

3. What is the price of a three-year, default-free security with a face value of $1000 and an annual coupon rate of 4%? What is the yield to maturity for this bond?

4. Consider a four-year, default-free security with annual coupon payments and a face value of $1000 that is traded at par. What is the coupon rate of this bond?

5. Suppose the General Motors Corporation issued a bond with 10 years until maturity, a face value of $1000, and a coupon rate of 7% (with annual payments). The yield to maturity on this bond when it was issued was 6%.

(a). What was the price of this bond when it was issued?

(b). Assuming the yield to maturity remains constant, what is the price of the bond immediately before it makes its first coupon payment?