honeycfa

Find the yield to maturity of a 6% coupon bond, priced at $1,115.00. The bond has 10 years to maturity and pays semi-annual coupon payments.

A) 4.56%.

B) 8.07%.

C) 5.87%.

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N = 10 × 2 = 20; PV = -1,115.00; PMT = 60/2 = 30; FV = 1,000.

Compute I = 2.28 (semiannual) × 2 = 4.56%

honeycfa

In capital markets, stock dividends and bond coupons generally provide what is referred to as:

A) current yield.

B) internal yield.

C) capital gain yield.

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Current yield is based on actual cash received during the investment horizon and is typically composed of dividends and interest.

honeycfa

Tony Ly is a Treasury Manager with Deeter Holdings, a large consumer products holding company. The Assistant Treasurer has asked Ly to calculate the current yield (CY) and the Yield-to-first Call (YTC) on a bond the company holds that has the following characteristics:

• 7 years to maturity
• $1,000 face value
• 7.0% semi-annual coupon
• Priced to yield 9.0%
• Callable at $1,060 in two years

If Ly calculates correctly, the CY and YTC are approximately:

CY

YTC

A) 7.80%    15.72%

B) 7.78%    15.82%

C) 7.80%    15.82%

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To calculate the CY and YTC, we first need to calculate the present value of the bond: FV = 1,000, N = 14 = 7 × 2, PMT = 35 =(1000 × 0.07)/2, I/Y = 4.5 (9 / 2), Compute PV = -897.77 (negative sign because we entered the FV and payment as positive numbers).

Then, CY = (Face value × Coupon) / PV of bond = (1,000 × 0.07) / 897.77 = 7.80%.

And finally, YTC  calculation: FV = 1,060 (price at first call), N = 4 (2 × 2), PMT = 35 (same as above), PV = -897.77 (negative sign because we entered the FV and payment as positive numbers), ComputeI/Y = 7.91 (semi-annual rate, need to multiply by 2) = 15.82%.

honeycfa

Which of the following statements concerning the current yield is CORRECT? It:

A) is of great interest to aggressive bond investors seeking capital gains.

B) is of great interest to conservative bond investors seeking current income.

C) can be deteremined by dividing coupon income by the face value of a bond.

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The current yield of a bond only considers interest income.  The capital gains/losses and reinvestment income are not considered.  The formula for current yield is the annual cash coupon payment divided by the bond price. 

honeycfa

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) 8.68%.

B) 10.68%.

C) 6.68%.

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PMT = 100; N = 10; FV = -500; PV = 975; CPT → I = 6.68

honeycfa

Which statement describes a premium bond and discount bond?

Premium bond

Discount bond

A) Coupon rate > current yield > yield-to-maturity Coupon rate < current yield < yield-to-maturity

B) Coupon rate > current yield < yield-to-maturity Coupon rate < current yield < yield-to-maturity

C) Coupon rate < current yield > yield-to-maturity Coupon rate < current yield < yield-to-maturity

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If the coupon rate > market yield, then bond will sell at a premium.
If the coupon rate < market yield, then bond will sell at a discount.
If the coupon rate = market yield, then bond will sell at par.
In addition, if the bond is selling at a premium, the current yield will be between the coupon rate and market rate.

honeycfa

A 20 year, 8% semi-annual coupon, $1,000 par value bond is selling for $1,100. The bond is callable in 4 years at $1,080. What is the bond's yield to call?

A) 8.13.

B) 6.87.

C) 7.21.

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n = 4(2) = 8; PMT = 80/2 = 40; PV = -1,100; FV = 1,080

Compute YTC = 3.435(2) = 6.87%

honeycfa

A 15-year, 10% annual coupon bond is sold for $1,150. It can be called at the end of 5 years for $1,100. What is the bond's yield to call (YTC)?

A) 8.0%.

B) 9.2%.

C) 8.4%.

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Input into your calculator:
N = 5; FV = 1,100; PMT = 100; PV = -1,150; CPT → I/Y = 7.95%.

honeycfa

The current yield on a bond is equal to:

A) the internal rate of return

B) the yield to maturity.

C) annual interest divided by the current market price.

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The formula for current yield is the annual cash coupon payment divided by the bond price. 

honeycfa

A 20-year, 9% semi-annual coupon bond selling for $914.20 offers a yield to maturity of:

A) 8%

B) 9%.

C) 10%.

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N = 40; PMT = 45; PV = -914.20; FV = 1,000; CPT → I/Y = 5%
YTM = 5% × 2 = 10%