Fixed Income【Reading 58】Sample 2012

prashantsahni

A 6-year annual interest coupon bond was purchased one year ago. The coupon rate is 10% and par value is $1,000. At the time the bond was bought, the yield to maturity (YTM) was 8%. If the bond is sold after receiving the first interest payment and the bond's yield to maturity had changed to 7%, the annual total rate of return on holding the bond for that year would have been:

A) 11.95%.

B) 7.00%.

C) 8.00%.

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Price 1 year ago N = 6, PMT = 100, FV = 1,000, I = 8, Compute PV = 1,092 Price now N = 5, PMT = 100, FV = 1,000, I = 7, Compute PV = 1,123
% Return = (1,123.00 + 100 − 1,092.46)/1,092.46 x 100 = 11.95%

prashantsahni

An investor purchased a 10-year zero-coupon bond with a yield to maturity of 10% and a par value of $1,000. What would her rate of return be at the end of the year if she sells the bond? Assume the yield to maturity on the bond is 9% at the time it is sold and annual compounding periods are used.

A) 19.42%.

B) 16.00%.

C) 15.00%.

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Purchase price: I = 10; N = 10; PMT = 0; FV = 1,000; CPT → PV = 385.54
Selling price: I = 9; N = 9; PMT = 0; FV = 1,000; CPT → PV = 460.43
% Return = (460.43 − 385.54) / 385.54 × 100 = 19.42%

kim226

If an investor holds a bond for a period less than the life of the bond, the rate of return the investor can expect to earn is called:

A) approximate yield.

B) bond equivalent yield.

C) expected return, or horizon return.

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The horizon return is the total return of a given horizon such as 5 years on a ten year bond.

kim226

A 30-year, 12% bond that pays interest annually is discounted priced to yield 14%. However, interest payments will be invested at 12%. The realized compound yield on this bond must be:

A) greater than 14.0%.

B) 12.0%.

C) between 12.0% and 14.0%.

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Since you are reinvesting the current income at 12%, you will have a return of at least 12%.  And since the bond is priced to yield 14%, you will earn no more than 14%.

kim226

An investor purchased a 6-year annual interest coupon bond one year ago. The coupon interest rate was 10% and the par value was $1,000. At the time he purchased the bond, the yield to maturity was 8%. If he sold the bond after receiving the first interest payment and the yield to maturity continued to be 8%, his annual total rate of return on holding the bond for that year would have been:

A) 8.00%.

B) 7.82%.

C) 9.95%.

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Purchase price N = 6, PMT = 100, FV = 1,000, I = 8
compute PV = 1,092.46
Sale price N = 5, PMT = 100, FV = 1,000, I = 8
compute PV = 1,079.85
% return = [(1,079.85 - 1,092.46 + 100) / 1,092.46] x 100 = 8%

kim226

A bond has a par value of $1,000, a time to maturity of 20 years, a coupon rate of 10% with interest paid annually, a current price of $850, and a yield to maturity (YTM) of 12%. If the interest payments are reinvested at 10%, the realized compounded yield on this bond is:

A) 10.0%.

B) 10.9%.

C) 12.0%.

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The realized yield would have to be between the reinvested rate of 10% and the yield to maturity of 12%. While no calculation is necessary to answer this question, the realized yield can be calculated as follows. The value of the reinvested coupons at the maturity date is: N = 20; I/Y = 10; PMT = 100; PV = 0; CPT FV = 5,727.50. Adding the principal repayment, total cash at maturity is $6,727.50.
Realized yield: N = 20; PMT = 0; PV = -850; FV = 6727.5; CPT I/Y = 10.8975.

kim226

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%.

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N = 8; PMT = 120; PV = -1,150; FV = 1,100; CPT → I/Y.

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What is the bond's yield to maturity (YTM)?

A) 10.55%.

B) 9.26%.

C) 10.34%.

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N = 28; PMT = 120; PV = -1,150; FV = 1,000; CPT → I/Y.

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What rate should be used to estimate the potential return on this bond?

A) 10.34%.

B) the YTM.

C) the YTC.

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The yield to call should be used since the bond could be called in the future. Because the bond is callable using yield to maturity would give a falsely increased rate of return.

kim226

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%.

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N = 8; PMT = 120; PV = -1,150; FV = 1,100; CPT → I/Y.

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What is the bond's yield to maturity (YTM)?

A) 10.55%.

B) 9.26%.

C) 10.34%.

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N = 28; PMT = 120; PV = -1,150; FV = 1,000; CPT → I/Y.

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What rate should be used to estimate the potential return on this bond?

A) 10.34%.

B) the YTM.

C) the YTC.

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The yield to call should be used since the bond could be called in the future. Because the bond is callable using yield to maturity would give a falsely increased rate of return.

kim226

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

A) YTM.

B) HPR.

C) YTC.

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To estimate the return at the point of a call the yield to call (YTC) measure is used.  This is different than the YTM because the YTC uses the call price as the future value and uses the time to first call instead of the time to maturity.

kim226

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) 11.9%.

C) 10.4%.

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N = 2 × 2 = 4; PV = -875.60; PMT = 70/2 = 35; FV = 950; CPT → I/Y = 5.94 × 2 = 11.88%.