Math 365

Quiz on Chapter 7

Due Wed. December 3

This is an open-book quiz, use any resource you like. Please show all of your work on a separate sheet or sheets. No work/no credit.

Name:______________________________

A $10,000 8% bond is purchased by A to yield 6.5% when there is exactly 20 years to maturity. After exactly 12 years and 2 months pass, A sells the bond to B at a price to yield 5% to maturity. Answer the following questions to the nearest whole dollar, or to the nearest basis point (0.01%). Be careful! You may need to hold more accuracy in the early answers in order to achieve the required accuracy on the later answers.

1. What premium arises in A’s original purchase? $____________

2. How much premium does A amortize during the first 12 years? $___________

3. How much premium does A amortize during the final 2 months? $__________

4. What interest does A earn during the final 2 months? $__________

5. What flat price does B pay? $_______________

6. What is A’s capital gain or (loss) on the sale? $______________

7. What premium arises in B’s purchase? $_______________

8. How much of B’s 1^st coupon goes to amortize premium? $_______________

9. How much of it goes to return what B paid A for the coupon? $_______________

10. How much of it goes to interest for the first 4 months? $____________________

11. What annual rate of simple interest does A earn during the final 2 months?____%

12. What annual rate of simple interest does B earn during the first 4 months?_____%

13. What annual effective rate does A earn during the final 2 months?_______%

14. What annual effective rate does B earn during the first 4 months?________%