LOS a: Explain the sources of return from investing in a bond.

Q1. A bond has a par value of $1,000, a time to maturity of 20 years, a coupon rate of 10% with interest paid annually, a current price of $850, and a yield to maturity (YTM) of 12%. If the interest payments are reinvested at 10%, the realized compounded yield on this bond is:

A)   10.00%.

B)   10.9%.

C)   12.0%.

Q2. A 30-year, 12% bond that pays interest annually is discounted priced to yield 14%. However, interest payments will be invested at 12%. The realized compound yield on this bond must be:

A)   between 12.0% and 14.0%.

B)   greater than 14.0%.

C)   12.0%.

Q3. If an investor holds a bond for a period less than the life of the bond, the rate of return the investor can expect to earn is called:

A)   expected return, or horizon return.

B)   approximate yield.

C)   bond equivalent yield.

Q4. An investor purchased a 10-year zero-coupon bond with a yield to maturity of 10% and a par value of $1,000. What would her rate of return be at the end of the year if she sells the bond? Assume the yield to maturity on the bond is 9% at the time it is sold and annual compounding periods are used.

A)   19.42%.

B)   16.00%.

C)   15.00%.

Q5. A 6-year annual interest coupon bond was purchased one year ago. The coupon rate is 10% and par value is $1,000. At the time the bond was bought, the yield to maturity (YTM) was 8%. If the bond is sold after receiving the first interest payment and the bond's yield to maturity had changed to 7%, the annual total rate of return on holding the bond for that year would have been:

A)   7.00%.

B)   8.00%.

C)   11.95%.

Q6. An investor purchased a 6-year annual interest coupon bond one year ago. The coupon interest rate was 10% and the par value was $1,000. At the time he purchased the bond, the yield to maturity was 8%. If he sold the bond after receiving the first interest payment and the yield to maturity continued to be 8%, his annual total rate of return on holding the bond for that year would have been:

A)   7.82%.

B)   8.00%.

C)   9.95%.

LOS a: Explain the sources of return from investing in a bond. fficeffice" />

Q1. A bond has a par value of $1,000, a time to maturity of 20 years, a coupon rate of 10% with interest paid annually, a current price of $850, and a yield to maturity (YTM) of 12%. If the interest payments are reinvested at 10%, the realized compounded yield on this bond is:

A)   10.00%.

B)   10.9%.

C)   12.0%.

Correct answer is B)

The realized yield would have to be between the reinvested rate of 10% and the yield to maturity of 12%.

Q2. A 30-year, 12% bond that pays interest annually is discounted priced to yield 14%. However, interest payments will be invested at 12%. The realized compound yield on this bond must be:

A)   between 12.0% and 14.0%.

B)   greater than 14.0%.

C)   12.0%.

Correct answer is A)

Since you are reinvesting the current income at 12%, you will have a return of at least 12%.  And since the bond is priced to yield 14%, you will earn no more than 14%.

Q3. If an investor holds a bond for a period less than the life of the bond, the rate of return the investor can expect to earn is called:

A)   expected return, or horizon return.

B)   approximate yield.

C)   bond equivalent yield.

Correct answer is A)

The horizon return is the total return of a given horizon such as 5 years on a ten year bond.

Q4. An investor purchased a 10-year zero-coupon bond with a yield to maturity of 10% and a par value of $1,000. What would her rate of return be at the end of the year if she sells the bond? Assume the yield to maturity on the bond is 9% at the time it is sold and annual compounding periods are used.

A)   19.42%.

B)   16.00%.

C)   15.00%.

Correct answer is A)

Purchase price: I = 10; N = 10; PMT = 0; FV = 1,000; CPT → PV = 385.54

Selling price: I = 9; N = 9; PMT = 0; FV = 1,000; CPT → PV = 460.43

% Return = (460.43 ? 385.54) / 385.54 × 100 = 19.42%

Q5. A 6-year annual interest coupon bond was purchased one year ago. The coupon rate is 10% and par value is $1,000. At the time the bond was bought, the yield to maturity (YTM) was 8%. If the bond is sold after receiving the first interest payment and the bond's yield to maturity had changed to 7%, the annual total rate of return on holding the bond for that year would have been:

A)   7.00%.

B)   8.00%.

C)   11.95%.

Correct answer is C)

Price 1 year ago N = 6, PMT = 100, FV = 1,000, I = 8, Compute PV = 1,092

Price now N = 5, PMT = 100, FV = 1,000, I = 7, Compute PV = 1,123

% Return = (1,123.00 + 100 ? 1,092.46)/1,092.46 x 100 = 11.95%

Q6. An investor purchased a 6-year annual interest coupon bond one year ago. The coupon interest rate was 10% and the par value was $1,000. At the time he purchased the bond, the yield to maturity was 8%. If he sold the bond after receiving the first interest payment and the yield to maturity continued to be 8%, his annual total rate of return on holding the bond for that year would have been:

A)   7.82%.

B)   8.00%.

C)   9.95%.

Correct answer is B)

Purchase price N = 6, PMT = 100, FV = 1,000, I = 8

compute PV = 1,092.46

ffice:smarttags" />Sale price N = 5, PMT = 100, FV = 1,000, I = 8

compute PV = 1,079.85

% return = [(1,079.85 - 1,092.46 + 100) / 1,092.46] x 100 = 8%

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