kim226

A 20 year, 8% semi-annual coupon, $1,000 par value bond is selling for $1,100. The bond is callable in 4 years at $1,080. What is the bond's yield to call?

A) 8.13.

B) 6.87.

C) 7.21.

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n = 4(2) = 8; PMT = 80/2 = 40; PV = -1,100; FV = 1,080
Compute YTC = 3.435(2) = 6.87%

kim226

What is the current yield for a 5% three-year bond whose price is $93.19?

A) 5.00%.

B) 2.68%.

C) 5.37%.

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The current yield is computed as follows:
Current yield = 5% x 100 / $93.19 = 5.37%

karoliukas

A coupon bond that pays interest annually is selling at par, matures in 5 years, and has a coupon rate of 12%. The yield to maturity on this bond is:

A) 12.00%.

B) 60.00%.

C) 8.33%.

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N = 5; PMT = 120; PV = -1,000; FV = 1,000; CPT → I = 12
Hint: the YTM equals the coupon rate when a bond is selling at par.

karoliukas

A 20-year, 10% semi-annual coupon bond selling for $925 has a promised yield to maturity (YTM) of:

A) 10.93%.

B) 11.23%.

C) 9.23%.

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N = 40, PMT = 50, PV = -925, FV = 1,000, CPT I/Y.

karoliukas

A 30-year, 10% annual coupon bond is sold at par. It can be called at the end of 10 years for $1,100. What is the bond's yield to call (YTC)?

A) 8.9%.

B) 10.0%.

C) 10.6%.

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N = 10; PMT = 100; PV = 1,000; FV = 1,100; CPT → I = 10.6.

karoliukas

The bond's yield-to-maturity is:

A) the discount rate that equates the present value of the cash flows received with the price of the bond.

B) based on the assumption that the bond is held to maturity and all coupons are reinvested at the yield-to-maturity.

C) both of these are correct.

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The yield to maturity (YTM) is the interest rate that will make the present value of the cash flow from a bond equal to its market price plus accrued interest and is the most popular of all yield measures used in the bond marketplace.

karoliukas

A 6% semi-annual pay bond, priced at $860 has 10 years to maturity. Find the yield to maturity and determine if the price of this bond will be lower or higher than a zero coupon bond.

YTM

Compared to zero coupon bond

A) 8.07%    higher price

B) 8.07%    lower price

C) 4.03%    higher price

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N = 2 × 10 = 20; PV = -$860.00; PMT = $30; FV = $1,000. Compute I/Y = 4.033 × 2 = 8.07%.
The price of this bond will most likely be higher than a zero coupon bond because this bond pays coupons to the holder.

karoliukas

What rate of return will an investor earn if they buy a 20-year, 10% annual coupon bond for $900? They plan on selling this bond at the end of five years for $951.  Calculate the rate of return and the current yield at the end of five years.

Rate of return

Current yield

A) 9.4% 11.00%

B) 12.0% 10.51%

C) 12.0% 11.00%

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Realized (horizon) yield = rate of return based on reinvestment rate on selling price at the end of the holding period horizon.
PV = 900; FV = 951; n = 5; PMT = 100; compute i = 12%
Current Yield = annual coupon payment / bond price
CY = 100 / $951 = 0.1051 or 10.51%

karoliukas

A five-year bond with a 7.75% semiannual coupon currently trades at 101.245% of a par value of $1,000. Which of the following is closest to the current yield on the bond?

A) 7.53%.

B) 7.65%.

C) 7.75%.

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The current yield is computed as: (Annual Cash Coupon Payment) / (Current Bond Price). The annual coupon is: ($1,000)(0.0775) = $77.50. The current yield is then: ($77.50) / ($1,012.45) = 0.0765 = 7.65%.

karoliukas

Suppose that IBM has a $1,000 par value bond outstanding with a 12% semiannual coupon that is currently trading at 102.25 with seven years to maturity. Which of the following is closest to the yield to maturity (YTM) on the bond?

A) 11.21%.

B) 11.52%.

C) 11.91%.

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To find the YTM, enter PV = –$1,022.50; PMT = $60; N = 14; FV = $1,000; CPT → I/Y = 5.76%. Now multiply by 2 for the semiannual coupon payments: (5.76)(2) = 11.52%.