Money and Banking Assignment: Interest Rates, Bond Yields & Duration

This assignment provides a comprehensive analysis of various concepts in money and banking, including simple interest loans, fixed-payment loans, coupon bonds, yield-to-maturity, current yield, and the relationship between nominal and real interest rates. It involves calculating interest payments, monthly loan payments, current and expected bond yields, capital gains, and the impact of yield changes on bond prices. Furthermore, it explores the total interest earned on bonds, face value at maturity, and the average annual rate of return, highlighting the effect of reinvestment rates. The assignment also covers the calculation of bond duration and yield to maturity on treasury bills, concluding with an assessment of real interest rates considering inflation. This detailed solution offers insights into debt security analysis and financial calculations, providing a valuable resource for students studying finance. Desklib provides a platform for accessing past papers and solved assignments for students.

Running head: MONEY AND BANKING
Money and Banking
Name of the Student:
Name of the University:
Authors Note:

MONEY AND BANKING
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Table of Contents
1. Indicating the interest paid each year on the simple-interest loan:........................................2
2. Indicating the amount of cheque to pay off loan in one year:................................................2
3. Calculating the monthly payment needed to pay off the fixed-payment loans:.....................2
4. Calculating the current yield of each bond:...........................................................................3
5. Calculating the expected yield of each bond:........................................................................3
6. Calculating the rate of capital gain when bond sells for $900:..............................................3
7.a Calculating market price of bond 1 with YTM changes to 11%:.........................................3
7.b Calculating market price of bond 2 with YTM changes to 11%:........................................4
7.c Calculating dollar change in bond 1 with YTM changes to 11%:.......................................4
7.d Calculating dollar change in bond 2 with YTM changes to 11%:.......................................4
7.e Calculating percentage change in price of bond 1 with YTM changes to 11%:..................4
7.f Calculating percentage change in price of bond 2 with YTM changes to 11%:..................5
7.g Indicating why the changes in expected yield to maturity is the same, while change in
bond price is different:...............................................................................................................5
8.a Calculating the total interest earned on bond over next four years:.....................................5
8.b Calculating the face value received at maturity:..................................................................5
8.c Calculating the total cash available over the next four years to the bond holders:..............5
8.d Calculating the average annual rate of return for bond holder earnings:.............................6
8.e Indicating why reinvestment rate affect the annual rate of return for the same bond:.........6
8.f Calculating the duration of bond, where expected rate of return on the bonds is 10%:.......6
9. Indicating the yield to maturity on the treasury bill:..............................................................7
10. Calculating the real rate of interest if the nominal rate is 10% and inflation rate is 3%:....7
Bibliography:..............................................................................................................................8

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1. Indicating the interest paid each year on the simple-interest loan:
Loan amount = 800
Interest rate = 5%
Interest amount = 800 x 5% = 40
Hence, the simple interest paid is at the levels of 40.
2. Indicating the amount of cheque to pay off loan in one year:
Loan amount = 800
Interest rate = 5%
Interest amount = 800 x 5% = 40
Total cheque amount = 800 + 40 = 840
Therefore, after one year the total cheque amount after interest is at the levels of 840.
3. Calculating the monthly payment needed to pay off the fixed-payment loans:
Particulars Value
Loan amount 5000
Interest 12% = 12%/12 = 0.01
Time 19 = 19*12 = 228
PMT $55.77
The monthly payment on fixed -payment loan is at the level of $55.77.

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4. Calculating the current yield of each bond:
Particulars Bond 1 Bond 2
FV 1000 1000
Current price 930.5 859.5
Coupon
payment
100 100
Current yield 10.75% 11.63%
5. Calculating the expected yield of each bond:
Particulars Bond 1 Bond 2
FV 1000 1000
Current price 930.5 859.5
Coupon payment 100 100
Expected Yield to
maturity
12.30% 12.54%
6. Calculating the rate of capital gain when bond sells for $900:
Particulars Bond 1 Bond 2
Selling price 900 900
Current
price
930.5 859.5
Capital gain -3.28% 4.71%
7.a Calculating market price of bond 1 with YTM changes to 11%:
Particulars Bond 1

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Bond current price 930.5
YTM 11.0%
Market Price $969.0
7.b Calculating market price of bond 2 with YTM changes to 11%:
Particulars Bond 2
Bond current price 859.5
YTM 11.0%
Market Price $941.1
7.c Calculating dollar change in bond 1 with YTM changes to 11%:
Particulars Bond 1
Bond current price 930.5
YTM 11.0%
Dollar change in price $38.5
7.d Calculating dollar change in bond 2 with YTM changes to 11%:
Particulars Bond 2
Bond current price 859.5
YTM 11.0%
Dollar change in price $81.6
7.e Calculating percentage change in price of bond 1 with YTM changes to 11%:
Particulars Bond 1
Bond current price 930.5

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YTM 11.0%
Percentage change in
price
4.1%
7.f Calculating percentage change in price of bond 2 with YTM changes to 11%:
Particulars Bond 2
Bond current price 859.5
YTM 11.0%
Percentage change in
price
9.5%
7.g Indicating why the changes in expected yield to maturity is the same, while change
in bond price is different:
The major changes in bond price only occurs, due to the interest rates and tenure,
which directly shapes its market price, while the yield to maturity is same.
8.a Calculating the total interest earned on bond over next four years:
Particulars Bond 1
FV 1,000
Interest 10%
Yearly income 100
Yearly income after 4
years
$400.0

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8.b Calculating the face value received at maturity:
Particulars Bond 1
FV 1,000
8.c Calculating the total cash available over the next four years to the bond holders:
Particulars Value 10% Value 15%
FV 1000 1000
Interest 10% 15%
Yearly income 10
0
150
Income after 4 years 1400 1600
8.d Calculating the average annual rate of return for bond holder earnings:
Particulars Value
10%
Annual return +1 Value
15%
Annual return +1
Year 1 11% 1.11 10% 1.10
Year 2 10% 1.10 9% 1.09
Year 3 9% 1.09 8% 1.08
Year 4 8% 1.08 7% 1.07
Average Annual return 9.50% 8.56%
8.e Indicating why reinvestment rate affect the annual rate of return for the same bond:
The reinvestment rate mainly increases the annual rate of return from the same bond,
as the annual coupon payments is invested back in the bond, which can help in generating
higher returns from investment.

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8.f Calculating the duration of bond, where expected rate of return on the bonds is
10%:
Particulars Amount
FV 1000
Return 10%
Time 4
Duration 1.06
9. Indicating the yield to maturity on the treasury bill:
Particulars Amount
FV 10000
Cost 9580
Yield to maturity 4.38%
10. Calculating the real rate of interest if the nominal rate is 10% and inflation rate is
3%:
Particulars Value
Nominal rate 10%
Inflation rate 3%
Real rate 7%

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Bibliography:
Mumpuni, Mila, and Ade Sonny Martin. "Assessment of Official Bond as an Intangible Asset
and Its Implications on the Restitution of State Losses Due to Violations Against the Official
Bond at the Ministry of Finance." Jurnal Dinamika Akuntansi 8.2 (2017): 117-130.
Natter, Markus, Martin Rohleder, and Marco Wilkens. "Duration-adjusted bond fund
performance." (2018).
Schlarbaum, Gary G., George A. Racette, and John A. Boquist. "Duration and Risk
Assessment for Bonds and Common Stocks." Bond Duration and Immunization. Routledge,
2017. 102-107.
Smith, Donald J. "Valuation in a World of CVA, DVA, and FVA: A Tutorial on Debt
Securities and Interest Rate Derivatives." World Scientific Books (2017).