1215

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) 12.0% 10.51%

B) 9.4% 11.00%

C) 12.0% 11.00%

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Realized (horizon) yield = rate of return based on reinvestment rate on selling price at the end of the holding period horizon.

PV = 900; FV = 951; n = 5; PMT = 100; compute i = 12%

Current Yield = annual coupon payment / bond price

CY = 100 / $951 = 0.1051 or 10.51%

1215

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%    higher price

B) 8.07%    lower price

C) 4.03%    higher price

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N = 2 × 10 = 20; PV = -$860.00; PMT = $30; FV = $1,000. Compute I/Y = 4.033 × 2 = 8.07%.

The price of this bond will most likely be higher than a zero coupon bond because this bond pays coupons to the holder.

1215

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.

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The yield to maturity (YTM) is the interest rate that will make the present value of the cash flow from a bond equal to its market price plus accrued interest and is the most popular of all yield measures used in the bond marketplace.

 

1215

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%.

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PMT = 100
FV = 1,000
N = 5
PV = 1,000 ? 72 = 928
compute I = 11.997% or 12.00%

1215

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) 14.74%.

C) 14.00%.

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(0.14)(1,000) = $140 coupon

140/950 × 100 = 14.74