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Problems and Solutions
1 CHAPTER 1—Problems
1.1 Problems on Bonds
Exercise 1.1 On 12/04/01, consider a fixed-coupon bond whose features are the following:
• face value: $1,000
• coupon rate: 8%
• coupon frequency: semiannual
• maturity: 05/06/04
What are the future cash flows delivered by this bond?
Solution 1.1 1. The coupon cash flow is equal to $40
8% × $1,000
Coupon = = $40
2
It is delivered on the following future dates: 05/06/02, 11/06/02, 05/06/03,
11/06/03 and 05/06/04.
The redemption value is equal to the face value $1,000 and is delivered
on maturity date 05/06/04.
Exercise 1.3 An investor has a cash of $10,000,000 at disposal. He wants to invest in a bond with
$1,000 nominal value and whose dirty price is equal to 107.457%.
1. What is the number of bonds he will buy?
2. Same question if the nominal value and the dirty price of the bond are respec-
tively $100 and 98.453%.
Solution 1.3 1. The number of bonds he will buy is given by the following formula
Cash
Number of bonds bought =
Nominal Value of the bond × dirty price
Here, the number of bonds is equal to 9,306
10,000,000
n = = 9,306.048
1,000 × 107.457%
2. n
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