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%

karoliukas

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%.

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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%.

karoliukas

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 $38.

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

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

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