Reading 65:Yield Measures, Spot Rates, and Forward Rates-

return, current, payments, interest, investing

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%.