LOS b, (Part 1): Compute and interpret the traditional yield measures for fixed-rate bonds.

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) 14.46%.

B) 7.73%.

C) 14.92%.

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) 5.16%.

B) 9.14%.

C) 4.72%.

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%.

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) 7.65%.

B) 7.53%.

C) 7.75%.

The yield to call is a less conservative yield measure than the yield to maturity whenever the price of a callable bond is quoted at a value:

A) equal to par value less one year's interest.

B) equal to or greater than par value plus one year's interst.

C) more than par.

Consider a 5-year, semiannual, 10% coupon bond with a maturity value of 1,000 selling for $1,081.11. The first call date is 3 years from now and the call price is $1,030. What is the yield-to-call?

A) 7.82%.

B) 7.28%.

C) 3.91%.

A 12% coupon bond with semiannual payments is callable in 5 years. The call price is $1,120. If the bond is selling today for $1,110, what is the yield-to-call?

A) 10.95%.

B) 11.25%.

C) 10.25%.

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.

Consider the purchase of an existing bond selling for $1,150. This bond has 28 years to maturity, pays a 12% annual coupon, and is callable in 8 years for $1,100.

What is the bond's yield to call (YTC)?

A) 10.55%.

B) 10.05%.

C) 9.26%.

A) 10.55%.

B) 9.26%.

C) 10.34%.

A) the YTC.

B) 10.34%.

C) the YTM.

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%

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%    lower price

B) 8.07%    higher price

C) 4.03%    higher price

The bond's yield-to-maturity is:

A) both of these are correct.

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

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

A coupon bond which pays interest $100 annually has a par value of $1,000, matures in 5 years, and is selling today at a $72 discount from par value. The yield to maturity on this bond is:

A) 7.00%.

B) 8.33%.

C) 12.00%.

If a $1,000 bond has a 14% coupon rate and a current market price of 950, what is the current market yield?

A) 15.36%.

B) 14.00%.

C) 14.74%.

A zero coupon bond with a face value of $1,000 has a price of $148. It matures in 20 years. Assuming annual compounding periods, the yield to maturity of the bond is:

A) 10.02%.

B) 9.68%.

C) 14.80%.

To estimate the actual return of a bond when a callable bond's market price is higher than par use:

A) YTM.

B) YTC.

C) HPR.

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) 10.6%.

B) 8.9%.

C) 10.0%.

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%.

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) 60.00%.

B) 8.33%.

C) 12.00%.

A 20-year, $1,000 face value, 10% semi-annual coupon bond is selling for $875. The bond's yield to maturity is:

A) 5.81%.

B) 11.62%.

C) 11.43%.

A 20-year, 9% semi-annual coupon bond selling for $1,000 offers a yield to maturity of:

A) 9%.

B) 11%.

C) 10%.

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

A) 8%.

B) 10%.

C) 9%.

The current yield on a bond is equal to:

A) the internal rate of return

B) the yield to maturity.

C) annual interest divided by the current market price.

A 20-year, 9% semi-annual coupon bond selling for $914.20 offers a yield to maturity of:

A) 8%

B) 9%.

C) 10%.

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%.

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.

A 15-year, 10% annual coupon bond is sold for $1,150. It can be called at the end of 5 years for $1,100. What is the bond's yield to call (YTC)?

A) 8.0%.

B) 9.2%.

C) 8.4%.

Which of the following statements concerning the current yield is CORRECT? It:

A) is of great interest to aggressive bond investors seeking capital gains.

B) is of great interest to conservative bond investors seeking current income.

C) can be deteremined by dividing coupon income by the face value of a bond.

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) 8.68%.

B) 10.68%.

C) 6.68%.

Which statement describes a premium bond and 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

Find the yield to maturity of a 6% coupon bond, priced at $1,115.00. The bond has 10 years to maturity and pays semi-annual coupon payments.

A) 4.56%.

B) 8.07%.

C) 5.87%.

In capital markets, stock dividends and bond coupons generally provide what is referred to as:

A) current yield.

B) internal yield.

C) capital gain yield.

Tony Ly is a Treasury Manager with Deeter Holdings, a large consumer products holding company. The Assistant Treasurer has asked Ly to calculate the current yield (CY) and the Yield-to-first Call (YTC) on a bond the company holds that has the following characteristics:

• 7 years to maturity
• $1,000 face value
• 7.0% semi-annual coupon
• Priced to yield 9.0%
• Callable at $1,060 in two years

If Ly calculates correctly, the CY and YTC are approximately:

A) 7.80%    15.72%

B) 7.78%    15.82%

C) 7.80%    15.82%

An 11% coupon bond with annual payments and 10 years to maturity is callable in 3 years at a call price of $1,100. If the bond is selling today for 975, the yield to call is:

A) 9.25%.

B) 10.26%.

C) 14.97%.

A coupon bond pays annual interest, has a par value of $1,000, matures in 4 years, has a coupon rate of $100, and a yield to maturity of 12%. The current yield on this bond is:

A) 11.25%.

B) 9.50%.

C) 10.65%.

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) negative current yield and a capital gain.

B) positive current yield and a capital gain.

C) positive current yield, only.

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%.

What is the yield to call on a bond that has an 8% coupon paid annually, $1,000 face value, 10 years to maturity and is first callable in 6 years? The current market price is $1,100. The call price is the face value plus 1-year’s interest.

A) 7.02%.

B) 7.14%.

C) 6.00%.

A $1,000 bond with an annual coupon rate of 10% has 10 years to maturity and is currently priced at $800. What is the bond's approximate yield-to-maturity?

A) 12.6%.

B) 13.8%.

C) 11.7%.

Which of the following describes the yield to worst? The:

A) yield given default on the bond.

B) lowest of all possible yields to call and yields to put.

C) lowest of all possible prices on the bond.

When a bond's coupon rate is greater than its current yield, and its current yield is greater than its yield to maturity, the bond is a:

A) discount bond.

B) premium bond.

C) par value bond.

Calculate the current yield and the yield-to-first call on a bond with the following characteristics:

• 5 years to maturity
• $1,000 face value
• 8.75% semi-annual coupon
• Priced to yield 9.25%
• Callable at $1,025 in two years

A) 8.93% 5.51%

B) 9.83% 19.80%

C) 8.93% 11.02%

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) 8.9%    lower

B) 9.1%    higher

C) 8.9%    higher

An investor is interested in buying a 4-year, $1,000 face value bond with a 7% coupon and semi-annual payments. The bond is currently priced at $875.60. The first put price is $950 in 2 years. The yield to put is closest to:

A) 8.7%.

B) 10.4%.

C) 11.9%.

When computing the yield to maturity, the implicit reinvestment assumption is that the interest payments are reinvested at the:

A) prevailing yield to maturity at the time interest payments are received.

B) coupon rate.

C) yield to maturity at the time of the investment.

The yield to maturity (YTM) is:

A) the discount rate that will set the present value of the payments equal to the bond price.

B) neither of these answers are correct.

C) below the coupon rate when the bond sells at a discount, and about the coupon rate when the bond sells at a premium.

Which of the following is a limitation of the cash flow yield measure? The cash flow yield measure:

A) assumes that interest rates do not change over the life of the security.

B) assumes a flat yield curve.

C) assumes that the projected cash flows are reinvested at the cash flow yield.

Regarding the computation of the cash flow yield for an agency security, which of the following is the best reason why the assumption that the projected cash flows are actually realized is very restrictive?

A) Interest rate risk.

B) Prepayments.

C) Default risk.

In which of the following cases is the bond selling at a discount? The coupon rate is:

A) greater than current yield and current yield is greater than yield-to-maturity.

B) smaller than current yield and current yield is smaller than yield-to-maturity.

C) smaller than current yield and current yield is greater than yield-to-maturity.

In which of the following conditions is the bond selling at a premium? The coupon rate:

A) current rate and yield-to-maturity are all the same.

B) is less than current yield, which is less than yield-to-maturity.

C) is greater than current yield, which is greater than yield-to-maturity.

A bond will sell at a discount when the coupon rate is:

A) less than the current yield and the current yield is less than the yield to maturity.

B) greater than the current yield and the current yield is greater than the yield to maturity.

C) less than the current yield and the current yield is greater than the yield to maturity.

Which of the following statements concerning the yield-to-maturity on a bond is CORRECT? Yield to maturity (YTM) is:

A) based on the assumption that any payments received are reinvested at the current yield.

B) the discount rate that will set the present value of the payments equal to the bond price.

C) below the current yield minus capital gain when the bond sells at a discount, and above the current yield plus capital loss when the bond sells at a premium.