Chapter 6 - Bond Valuation and Interest Rates

Question 1

Calculate the current price of the following $1000 FV bonds with 7 years to maturity:

a) BOND A: Market yield 6.5%, semi-annual coupon payments (8%)

b) BOND B: Market yield 6.5%, annual coupon payments (8%)

c) BOND C: Market yield 6.5%, zero coupon payments

d) BOND D: Market yield 9.2%, semi-annual coupon payments (8%)

e) BOND E: Market yield 9.2%, annual coupon payments (8%)

f) BOND F: Market yield 9.2%, zero coupon payments

g) Provide comments about your calculations - which bond would you prefer? Why?

Question 2

Holly is planning a 6 month vacation to Europe in one-year. She has saved C$10,000 and has two options to invest her money:

Option 1 - Invest in a 1-year Canadian T-bill 3.5%

Option 2 - Invest in a 1-year Euro T-bill 4.5%

The current spot rate is C$1.4810/ and the forward rate is C$1.4668/. Which option should Holly choose?

If the Canadian T-bill yield increased to 4%, what would the forward C$/ rate need to be to make Holly indifferent to her investment options?