karoliukas

If the coupon payments are reinvested at the coupon rate during the life of the issue, then the yield to maturity:

A) is less than the realized yield.

B) may be greater or less than the realized yield.

C) is greater than the realized yield.

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For the realized yield to equal the YTM, coupon reinvestments must occur at that YTM. Whether reinvesting the coupons at the coupon rate will result in a realized yield higher or lower than the YTM depends on whether the bond is at a discount (coupon < YTM) or a premium (coupon>YTM).

karoliukas

Jane Walker has set a 7% yield as the goal for the bond portion of her portfolio. To achieve this goal, she has purchased a 7%, 15-year corporate bond at a discount price of 93.50. What amount of reinvestment income will she need to earn over this 15-year period to achieve a compound return of 7% on a semiannual basis?

A) $459.

B) $624.

C) $574.

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935(1.035)30 = $2,624
Bond coupons: 30 × 35 = $1,050
Principal repayment: $1,000
2,624 − 1,000 – 1050 = $574 required reinvestment income

karoliukas

All else being equal, which of the following bond characteristics will lead to lower levels of coupon reinvestment risk?

A) Shorter maturities and lower coupon levels.

B) Longer maturities and higher coupon levels.

C) Shorter maturities and higher coupon levels.

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Other things being equal, the amount of reinvestment risk embedded in a bond will decrease with lower coupons because the there will be a lesser dollar amount to reinvest and with shorter maturities because the reinvestment period is shorter.

karoliukas

All else being equal, which of the following bond characteristics will lead to lower levels of coupon reinvestment risk?

A) Shorter maturities and lower coupon levels.

B) Longer maturities and higher coupon levels.

C) Shorter maturities and higher coupon levels.

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Other things being equal, the amount of reinvestment risk embedded in a bond will decrease with lower coupons because the there will be a lesser dollar amount to reinvest and with shorter maturities because the reinvestment period is shorter.

karoliukas

What is the bond-equivalent yield given if the monthly yield is equal to 0.7%?

A) 8.55%.

B) 8.65%.

C) 8.40%.

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The bond equivalent yield (BEY) is computed as follows:
BEY = 2 × [(1 + monthly yield)6 − 1] = 2 × [(1 + 0.007)6 − 1] = 8.55%

karoliukas

What is the annual-pay yield for a bond with a bond-equivalent yield of 5.6%?

A) 5.68%.

B) 5.60%.

C) 5.52%.

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The annual-pay yield is computed as follows:
Annual-pay yield = [(1 + 0.056 / 2)2 – 1

karoliukas

The yield to maturity for a semiannual-pay, 10-year corporate bond is 5.25%. What is the bond's annual equivalent yield?

A) 5.32%.

B) 5.00%.

C) 5.25%.

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The annual equivalent yield is equal to [1 + (nominal yield/number of payments per year)]number of payments per year – 1 = (1 + 0.0525/2)2 - 1 = 5.32%.

karoliukas

What is the semiannual-pay bond equivalent yield on an annual-pay bond with a yield to maturity of 12.51%?

A) 12.14%.

B) 12.00%.

C) 12.51%.

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The semiannual-pay bond equivalent yield of an annual-pay bond = 2 × [(1 + yield to maturity on the annual-pay bond)0.5 – 1] = 12.14%.

karoliukas

The yield to maturity on an annual-pay bond 5.6%, what is the bond equivalent yield for this bond?

A) 5.52%.

B) 5.43%.

C) 5.60%.

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The bond-equivalent yield is computed as follows:
Bond-equivalent yield = 2[(1 + 0.056)0.5 – 1] = 5.52%

karoliukas

What is the bond-equivalent yield if the monthly yield is equal to 0.5%?

A) 6.08%.

B) 6.00%.

C) 6.12%.

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The bond equivalent yield (BEY) is computed as follows:
BEY = 2 × [(1 + monthly yield)6 − 1] = 2 × [(1 + 0.005)6 − 1] = 6.08%