LOS d: Compute and interpret the bond equivalent yield of an annual-pay bond, and the annual-pay yield of a semiannual-pay bond.

Q1. Consider a 6-year $1,000 par bond priced at $1,011. The coupon rate is 7.5% paid semiannually. Six-year bonds with comparable credit quality have a yield to maturity (YTM) of 6%. Should an investor purchase this bond?

A)   Yes, the bond is undervalued by $64.

B)   Yes, the bond is undervalued by $38.

C)   No, the bond is overvalued by $64.

Q2. Sysco Foods has a 10-year bond outstanding with an annual coupon of 6.5%. If the bond is currently priced at $1,089.25, which of the following is closest to the bond-equivalent yield of the bond?

A)   5.26%.

B)   5.33%.

C)   5.42%.

Q3. 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%.

Q4. The yield to maturity for a semiannual-pay, 10-year corporate bond is 5.25%. What is the bond's annual equivalent yield?

A)   5.00%.

B)   5.25%.

C)   5.32%.

Q5. What is the annual-pay yield for a bond with a bond-equivalent yield of 5.6%?

A)   5.60%.

B)   5.68%.

C)   5.52%.

Q6. What is the bond-equivalent yield given if the monthly yield is equal to 0.7%?

A)   8.65%.

B)   8.40%.

C)   8.55%.

Q7. What is the bond-equivalent yield if the monthly yield is equal to 0.5%?

A)   6.00%.

B)   6.12%.

C)   6.08%.

Q8. The yield to maturity on an annual-pay bond 5.6%, what is the bond equivalent yield for this bond?

A)   5.43%.

B)   5.60%.

C)   5.52%.

LOS d: Compute and interpret the bond equivalent yield of an annual-pay bond, and the annual-pay yield of a semiannual-pay bond.fficeffice" />

Q1. Consider a 6-year $1,000 par bond priced at $1,011. The coupon rate is 7.5% paid semiannually. Six-year bonds with comparable credit quality have a yield to maturity (YTM) of 6%. Should an investor purchase this bond?

A)   Yes, the bond is undervalued by $64.

B)   Yes, the bond is undervalued by $38.

C)   No, the bond is overvalued by $64.

Correct answer is A)        

FV = 1,000
PMT = 37.5
N = 12
I/Y = 3%
CPT PV = 1,074.66
1,074.66 – 1,011 = 64

Q2. Sysco Foods has a 10-year bond outstanding with an annual coupon of 6.5%. If the bond is currently priced at $1,089.25, which of the following is closest to the bond-equivalent yield of the bond?

A)   5.26%.

B)   5.33%.

C)   5.42%.

Correct answer is A)        

First, find the annual yield to maturity of the bond as: FV = $1,000; PMT = $65; N = 10; PV = –1,089.25; CPT → I/Y = 5.33%. Then, find the BEY as: 2 × [(1 + YTM)^0.5 – 1] = 0.0526 = 5.26%.

Q3. 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%.

Correct answer is A)        

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%.

Q4. The yield to maturity for a semiannual-pay, 10-year corporate bond is 5.25%. What is the bond's annual equivalent yield?

A)   5.00%.

B)   5.25%.

C)   5.32%.

Correct answer is C)        

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%.

Q5. What is the annual-pay yield for a bond with a bond-equivalent yield of 5.6%?

A)   5.60%.

B)   5.68%.

C)   5.52%.

Correct answer is B)

The annual-pay yield is computed as follows:

Annual-pay yield = [(1 + 0.056 / 2)² – 1

Q6. What is the bond-equivalent yield given if the monthly yield is equal to 0.7%?

A)   8.65%.

B)   8.40%.

C)   8.55%.

Correct answer is C)

The bond equivalent yield (BEY) is computed as follows:

BEY = 2 × [(1 + monthly yield)⁶ ? 1] = 2 × [(1 + 0.007)⁶ ? 1] = 8.55%

Q7. What is the bond-equivalent yield if the monthly yield is equal to 0.5%?

A)   6.00%.

B)   6.12%.

C)   6.08%.

Correct answer is C)

The bond equivalent yield (BEY) is computed as follows:

BEY = 2 × [(1 + monthly yield)⁶ ? 1] = 2 × [(1 + 0.005)⁶ ? 1] = 6.08%

Q8. The yield to maturity on an annual-pay bond 5.6%, what is the bond equivalent yield for this bond?

A)   5.43%.

B)   5.60%.

C)   5.52%.

Correct answer is C)

The bond-equivalent yield is computed as follows:

Bond-equivalent yield = 2[(1 + 0.056)^0.5 – 1] = 5.52%

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