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ECON 4 Lecture Notes - Lecture 17: Cash Flow

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School
UCSD
Department
Economics
Course
ECON 4
Professor
Steven Levkoff

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Document Summary

The same as a and b amount of time. These bonds aren"t different, the first just has a larger initial investment. They will give you the same proportion of your money in the same. The price of a bond is always measured relative to the face value. The initial investment as how much of a percent of the face value. What matters is the ratio of what you put in to the face value of what you get out. Bond cash flow (-95, 5, 5, 5, 105) This bond is different from the other bonds even if the yield is the same because the coupon is different (-19, 1, 1, 1, 21) P/f = 95% (-100, 5, 5, 5, 105) This means that the interest rate is the coupon! (5%) The last period price is the coupon () plus the face value () If the coupon rate is larger than the yield, the price is higher than the face value.

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Related Questions

This assignment requires the following knowledge: For k different events, if the probability that each of them happens is p (0 < p < 1) and all events happen independently, the probability that all events happen together is p^k.
1. Five firms, namely A, B, C, D and E, issue discounted bonds with face value $1,000 and maturity 5 years in the market. All firms are pretty risky and each of them has a chance of 0.5 of collapse during the five years (thus bankrupted and can not pay back the bond accordingly). The bonds are all sold at an interest rate of 50% (the value is not surprising due to the extremely high risk of default).
(1) What is the present value of the bond given the interest rate, the face value and the maturity? Hint: we temporarily do not consider the issue of default.
(2) Say now you buy one bond from each of the five firms, what is the total amount you lend out today? Eventually only one firm does not fail and pays back the bond, what is the money you collect back 5 years later? You gain or loss in this case? If more than one firm pays back the bond, will you get more money back?
(3) What is the chance (probability) that you get nothing back assuming that firms fail independently? Together with the answer in (2), is it a good deal to buy one bond from each of the five firms?
(4) Repeat (2) and (3) with the only difference that now you buy 5 bonds from a single firm.
(5) Now we assume that the five firms all have similar businesses in Greece (and those are their only businesses), therefore, all firm fail together if the economy in Greece fails. Will you answer in (3) change?

1. In the USA: If the price of a $100 face value one-year bond is $105 and the coupon is $10, what is the current yield?

2. Considering number 1 above, has the price of the bond risen or declined from the date it was originally issued?

3. Considering number 1, above, has the interest rate gone up or down since the bond was issued?

4. How will investment spending react to the result you determined in 3 above?

5. Considering your answer to question 3, describe what will happen to the capital account in the balance of payments as a result.

6. Considering your answer to question 3, describe what will happen in the foreign exchange market as a result.


1) A $1,000 par value bond, paying $50 semiannually, with an 8 percent yield to maturity and five years remaining to maturity should sell for ________.

2) Your investment has a 40% chance of earning a 12% rate of return, a 50% chance of earning an 8% rate of return, and a 10% chance of losing 3%. What is the standard deviation of this investment?

3) You purchased a share of stock for $59. One year later you received $5.25 as a dividend and sold the share for $58. Your holding-period return was _________.

4) An insurance company purchases corporate bonds in the secondary market with six years to maturity. The total par value is $55 million. The coupon rate is 11 percent, with annual interest payments. If the expected required rate of return in 4 years is 9 percent, what will the market value of the bonds be then?