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%.

---

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%.

---

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.

---

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%.

---

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%.

---

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.

---

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%.

---

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

---

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

kim226

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) 9.68%.

B) 14.80%.

C) 10.02%.

---

PV = -148; N = 20; FV = 1,000; PMT = 0; CPT → I = 10.02.

kim226

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

Current Yield

Yield-to-Call

A) 8.93% 5.51%

B) 9.83% 19.80%

C) 8.93% 11.02%

---

To calculate the CY and YTC, we first need to calculate the present value of the bond: FV = 1,000; N = 5 × 2 = 10; PMT = (1000 × 0.0875) / 2 = 43.75; I/Y = (9.25 / 2) = 4.625; CPT → PV = -980.34 (negative sign because we entered the FV and payment as positive numbers). Then, CY = (Face value × Coupon) / PV of bond = (1,000 × 0.0875) / 980.34 = 8.93%.
And the YTC calculation is: FV = 1,025 (price at first call); N = (2 × 2) = 4; PMT = 43.75 (same as above); PV = –980.34 (negative sign because we entered the FV and payment as positive numbers); CPT → I/Y = 5.5117 (semi-annual rate, need to multiply by 2) = 11.02%.