honeycfa

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%    lower price

B) 8.07%    higher 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.

honeycfa

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.

honeycfa

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%

honeycfa

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) 14.00%.

C) 14.74%.

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

140/950 × 100 = 14.74

honeycfa

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) 10.02%.

B) 9.68%.

C) 14.80%.

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

honeycfa

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

A) YTM.

B) YTC.

C) HPR.

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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.

honeycfa

A 30-year, 10% annual coupon bond is sold at par. It can be called at the end of 10 years for $1,100. What is the bond's yield to call (YTC)?

A) 10.6%.

B) 8.9%.

C) 10.0%.

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N = 10; PMT = 100; PV = 1,000; FV = 1,100; CPT → I = 10.6.

honeycfa

A 20-year, 10% semi-annual coupon bond selling for $925 has a promised yield to maturity (YTM) of:

A) 10.93%.

B) 11.23%.

C) 9.23%.

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N = 40, PMT = 50, PV = -925, FV = 1,000, CPT I/Y.

honeycfa

A coupon bond that pays interest annually is selling at par, matures in 5 years, and has a coupon rate of 12%. The yield to maturity on this bond is:

A) 60.00%.

B) 8.33%.

C) 12.00%.

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N = 5; PMT = 120; PV = -1,000; FV = 1,000; CPT → I = 12

Hint: the YTM equals the coupon rate when a bond is selling at par.

honeycfa

A 20-year, $1,000 face value, 10% semi-annual coupon bond is selling for $875. The bond's yield to maturity is:

A) 5.81%.

B) 11.62%.

C) 11.43%.

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N = 40 (2 × 20 years); PMT = 50 (0.10 × 1,000) / 2; PV = -875; FV = 1,000; CPT → I/Y = 5.811 × 2 (for annual rate) = 11.62%.