Bond Valuation A.Suppose that you buy a one year discount bond that has a maturi
ID: 2383625 • Letter: B
Question
Bond Valuation
A.Suppose that you buy a one year discount bond that has a maturity value of $10,000 and the risk
free market rate is 3 percent. What is the highest price that you would be willing to pay for this bond?
B.Consider a 5
year, $50,000 face value, 4 percent coupon rate bond and suppose that the discount rate is 3 percent. What do you predict will be the market price for this bond?
4.Money
A.Provide a concise theoretical definition of money byreferencing the threeprimary functions of money. Also, describe two circumstances in which barter often replaces money as a means of exchange.
2B.For each of the following assets, indicate whether the asset is included in M1, M2, both, or neither.
I.Currency in circulation.
II.Money market mutual funds.
III.Large time deposits.
IV. Savings deposits
Explanation / Answer
1} Value of bond = Cashflows/(1+r)n
So in this sum maturity is after one year risk free
Value of bond= 103000/(1+0.03)1
=100000/0.9708
So maximum value payable for bond is $ 106098
2) Applying the formulae in 2nd sum:
= 1500/(1+.03)1+1500/(1+.03)2+1500/(1.03)3+51500/(1.03)4
= 1545.11+1500/0.9426+1500/0.9151+51500/0.8884
= 1545.11+1591.34+1639+57969
= $62744.45
3) Money can be defined as a current medium of exchange in the form of coins and banknotes; coins and banknotes collectively.
4a) Coins & currency in circulation= M1
4b) Money market mutual funds= M1 & M2
4c) Both
4d) Both