honeycfa

Find the yield to maturity of a 6% coupon bond, priced at $1,115.00. The bond has 10 years to maturity and pays semi-annual coupon payments.

A) 4.56%.

B) 8.07%.

C) 5.87%.

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N = 10 × 2 = 20; PV = -1,115.00; PMT = 60/2 = 30; FV = 1,000.

Compute I = 2.28 (semiannual) × 2 = 4.56%

honeycfa

In capital markets, stock dividends and bond coupons generally provide what is referred to as:

A) current yield.

B) internal yield.

C) capital gain yield.

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Current yield is based on actual cash received during the investment horizon and is typically composed of dividends and interest.

honeycfa

Tony Ly is a Treasury Manager with Deeter Holdings, a large consumer products holding company. The Assistant Treasurer has asked Ly to calculate the current yield (CY) and the Yield-to-first Call (YTC) on a bond the company holds that has the following characteristics:

• 7 years to maturity
• $1,000 face value
• 7.0% semi-annual coupon
• Priced to yield 9.0%
• Callable at $1,060 in two years

If Ly calculates correctly, the CY and YTC are approximately:

CY

YTC

A) 7.80%    15.72%

B) 7.78%    15.82%

C) 7.80%    15.82%

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To calculate the CY and YTC, we first need to calculate the present value of the bond: FV = 1,000, N = 14 = 7 × 2, PMT = 35 =(1000 × 0.07)/2, I/Y = 4.5 (9 / 2), Compute PV = -897.77 (negative sign because we entered the FV and payment as positive numbers).

Then, CY = (Face value × Coupon) / PV of bond = (1,000 × 0.07) / 897.77 = 7.80%.

And finally, YTC  calculation: FV = 1,060 (price at first call), N = 4 (2 × 2), PMT = 35 (same as above), PV = -897.77 (negative sign because we entered the FV and payment as positive numbers), ComputeI/Y = 7.91 (semi-annual rate, need to multiply by 2) = 15.82%.

honeycfa

An 11% coupon bond with annual payments and 10 years to maturity is callable in 3 years at a call price of $1,100. If the bond is selling today for 975, the yield to call is:

A) 9.25%.

B) 10.26%.

C) 14.97%.

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PMT = 110, N = 3, FV = 1,100, PV = 975

Compute I = 14.97

honeycfa

A coupon bond pays annual interest, has a par value of $1,000, matures in 4 years, has a coupon rate of $100, and a yield to maturity of 12%. The current yield on this bond is:

A) 11.25%.

B) 9.50%.

C) 10.65%.

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FV = 1,000; N = 4; PMT = 100; I = 12; CPT → PV = 939.25.

Current yield = coupon / current price

100 / 939.25 × 100 = 10.65

honeycfa

If interest rates and risk factors remain constant over the remainder of a coupon bond's life, and the bond is trading at a discount today, it will have a:

A) negative current yield and a capital gain.

B) positive current yield and a capital gain.

C) positive current yield, only.

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A coupon bond will have a positive current yield. If it is trading at a discount, it will have a capital gain because its value at maturity will be greater than its price today.

honeycfa

A 20-year bond with a par value of $1,000 and an annual coupon rate of 6% currently trades at $850. It has a promised yield of:

A) 7.9%.

B) 7.5%.

C) 6.8%.

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N = 20; FV = 1,000; PMT = 60; PV = -850; CPT → I = 7.5

honeycfa

What is the yield to call on a bond that has an 8% coupon paid annually, $1,000 face value, 10 years to maturity and is first callable in 6 years? The current market price is $1,100. The call price is the face value plus 1-year’s interest.

A) 7.02%.

B) 7.14%.

C) 6.00%.

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N = 6; PV = -1,100.00; PMT = 80; FV = 1,080; Compute I/Y = 7.02%.

honeycfa

A $1,000 bond with an annual coupon rate of 10% has 10 years to maturity and is currently priced at $800. What is the bond's approximate yield-to-maturity?

A) 12.6%.

B) 13.8%.

C) 11.7%.

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FV = 1,000, PMT = 100, N = 10, PV = -800

Compute I = 13.8

honeycfa

Which of the following describes the yield to worst? The:

A) yield given default on the bond.

B) lowest of all possible yields to call and yields to put.

C) lowest of all possible prices on the bond.

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Yield to worst involves the calculation of yield to call and yield to put for every possible call or put date, and determining which of these results in the lowest expected return.