kim226

Which statement describes a premium bond and discount bond?

Premium bond

Discount bond

A) Coupon rate > current yield < yield-to-maturity Coupon rate < current yield < yield-to-maturity

B) Coupon rate < current yield > yield-to-maturity Coupon rate < current yield < yield-to-maturity

C) Coupon rate > current yield > yield-to-maturity Coupon rate < current yield < yield-to-maturity

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If the coupon rate > market yield, then bond will sell at a premium.
If the coupon rate < market yield, then bond will sell at a discount.
If the coupon rate = market yield, then bond will sell at par.
In addition, if the bond is selling at a premium, the current yield will be between the coupon rate and market rate.

kim226

Harmon Moving has a 13.25% coupon semiannual coupon bond currently trading in the market at $1,229.50. The bond has eight years remaining until maturity, but only two years until first call on the issue at 107.50% of $1,000 par value. Which of the following is closest to the yield to first call on the bond?

A) 4.72%.

B) 5.16%.

C) 9.14%.

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To compute yield to first call, enter: FV = $1,075; N = 2 × 2 = 4; PMT = $66.25; PV = –1,229.50, CPT → I/Y = 2.36%, annualized as (2.36)(2) = 4.72%.

kim226

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

kim226

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

kim226

If a bond sells at a discount its:

A) coupon rate is less than the market rate of interest.

B) current yield is greater than its YTM.

C) coupon rate is greater than its current yield.

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When a bond sells at a discount, the market rate goes above the coupon rate and the bond's price falls below par. The current yield is the coupon rate / price, so as price falls below 1000 the current yield rises above the coupon rate. The YTM considers the current yield plus the capital gain associated with the discount.

kim226

PG&E has a bond outstanding with a 7% semiannual coupon that is currently priced at $779.25. The bond has remaining maturity of 10 years but has a first put date in 4 years at the par value of $1,000. Which of the following is closest to the yield to first put on the bond?

A) 7.73%.

B) 14.46%.

C) 14.92%.

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To compute yield to first put, enter: FV = $1,000; N = 2 × 4 = 8; PMT = $35; PV = -$779.25; CPT → I/Y = 7.23%, annualized as (7.23)(2) = 14.46%.

kim226

A 10% coupon bond, annual payments, maturing in 10 years, is expected to make all coupon payments, but to pay only 50% of par value at maturity. What is the expected yield on this bond if the bond is purchased for $975?

A) 6.68%.

B) 8.68%.

C) 10.68%.

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PMT = 100; N = 10; FV = 500; PV = -975; CPT → I = 6.68

kim226

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) positive current yield and a capital gain.

B) negative 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.

kim226

A 20-year, 9% annual coupon bond selling for $1,098.96 offers a yield of:

A) 8%.

B) 10%.

C) 9%.

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N = 20, PMT = 90, PV = -1,098.96, FV = 1,000, CPT I/Y

kim226

A $1,000 par value, 10%, semiannual, 20-year debenture bond is currently selling for $1,100. What is this bond's current yield and will the current yield be higher or lower than the yield to maturity?

Current Yield

Current Yield vs. YTM

A) 9.1%    higher

B) 8.9%    lower

C) 8.9%    higher

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Current yield = annual coupon payment/price of the bond
CY = 100/1,100 = 0.0909
The current yield will be between the coupon rate and the yield to maturity. The bond is selling at a premium, so the YTM must be less than the coupon rate, and therefore the current yield is greater than the YTM.
The YTM is calculated as: FV = 1,000; PV = -1,100; N = 40; PMT = 50; CPT → I = 4.46 × 2 = 8.92