hinsafdar

Given a required yield to maturity of 6%, what is the intrinsic value of a semi-annual pay coupon bond with an 8% coupon and 15 years remaining until maturity?

A) $1,095.

B) $1,196.

C) $1,202.

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This problem can be solved most easily using your financial calculator. Using semiannual payments, I = 6/2 = 3%; PMT = 80/2 = $40; N = 15 × 2 = 30; FV = $1,000; CPT → PV = $1,196.

hinsafdar

An investor buys a 10% semi annual coupon, 10-year bond for $1,000. The coupons can be reinvested at 12%. The investor estimates that the bond will be sold in 3 years $1,050.
Based on this information, what would be the average annual rate of return over the 3 years?

A) 13.5%.

B) 9.5%.

C) 11.5%.

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1. Find the FV of the coupons and interest on interest:

N = 3(2) = 6; I = 12/2 = 6; PMT = 50; CPT → FV = 348.77

2. Determine the value of the bond at the end of 3 years:

1,050.00 (given) + 348.77 (computed in step 1) = 1,398.77

3. Equate FV (1,398.77) with PV (1,000) over 3 years (N = 6); CPT → I = 5.75(2) = 11.5%

hinsafdar

What value would an investor place on a 20-year, $1,000 face value, 10% annual coupon bond, if the investor required a 9% rate of return?

A) $1,091.

B) $920.

C) $879.

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N = 20; I/Y = 9; PMT = 100 (0.10 × 1,000); FV = 1,000; CPT → PV = 1,091.

hinsafdar

A coupon bond that pays interest semi-annually has a par value of $1,000, matures in 5 years, and has a yield to maturity of 10%. What is the value of the bond today if the coupon rate is 8%?

A) $1,221.17.

B) $1,144.31.

C) $922.78.

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FV = 1,000; N = 10; PMT = 40; I = 5; CPT → PV = 922.78.

prashantsahni

If a bond sells at a discount and market rates are expected to stay the same until maturity, the price of the bond will:

A) increase over time, approaching the par value minus the final interest payment at maturity.

B) increase over time, approaching the par value at maturity.

C) remain constant until maturity.

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The bond’s price will increase towards the par value over time.

prashantsahni

A 5-year bond with a 10% coupon has a present yield to maturity of 8%. If interest rates remain constant one year from now, the price of the bond will be:

A) the same.

B) lower.

C) higher.

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A premium bond sells at more than face value, thus as time passes the bond value will converge upon the face value.

prashantsahni

An investor buys a 20-year, 10% semi-annual bond for $900. She wants to sell the bond in 6 years when she estimates yields will be 10%. What is the estimate of the future price?

A) $1,079.

B) $946.

C) $1,000.

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Since yields are projected to be 10% and the coupon rate is 10%, we know that the bond will sell at par value.

prashantsahni

An investor buys a 6% coupon 5-year corporate bond priced to yield 7%. If rates remain unchanged when the investor sells the bond in 2 years, the investor will receive a:

A) capital gain.

B) capital loss.

C) total return equal to the coupon yield.

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Current yield of a bond = coupon payment / market price of bond. Bonds with a coupon lower than the prevailing interest rate will trade at a discount to par. If interest rates remain the same as the bond nears maturity the price will increase towards its par value. Thus, when they are sold, the investor will receive a capital gain.

prashantsahni

A discount bond (nothing changes except the passage of time):

A) falls in value as time passes.

B) rises in value as time passes.

C) price is not related to time passing.

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A discount bond sells at less than face value, therefore as time passes the bond value will converge upon the face value.

prashantsahni

If market rates do not change, as time passes the price of a zero-coupon bond will:

A) approach the purchase price.

B) approach zero.

C) approach par.

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A bond's value may differ substantially from it's maturity value prior to maturity.  But as maturity draws nearer the bond's value converges to it's maturity value.  This statement is true for regular bonds as well as zero-coupon bonds.