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

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) the YTC.

B) 10.34%.

C) the YTM.

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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.

honeycfa

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) 9.4%    11.00%

B) 12.0%    10.51%

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%

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

Consider a 5-year, semiannual, 10% coupon bond with a maturity value of 1,000 selling for $1,081.11. The first call date is 3 years from now and the call price is $1,030. What is the yield-to-call?

A) 7.82%.

B) 7.28%.

C) 3.91%.

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N = 6; PMT = 50; FV = 1,030; PV = $1,081.11; CPT → I = 3.91054

3.91054 × 2 = 7.82

honeycfa

A 12% coupon bond with semiannual payments is callable in 5 years. The call price is $1,120. If the bond is selling today for $1,110, what is the yield-to-call?

A) 10.95%.

B) 11.25%.

C) 10.25%.

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PMT = 60; N = 10; FV = 1,120; PV = 1,110; CPT → I = 5.47546

(5.47546)(2) = 10.95

honeycfa

If a bond sells at a discount its:

A) coupon rate is less than the market rate of interest.

B) current yield is greater than its YTM.

C) coupon rate is greater than its current yield.

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When a bond sells at a discount, the market rate goes above the coupon rate and the bond's price falls below par. The current yield is the coupon rate / price, so as price falls below 1000 the current yield rises above the coupon rate. The YTM considers the current yield plus the capital gain associated with the discount.

honeycfa

Suppose that IBM has a $1,000 par value bond outstanding with a 12% semiannual coupon that is currently trading at 102.25 with seven years to maturity. Which of the following is closest to the yield to maturity (YTM) on the bond?

A) 11.21%.

B) 11.52%.

C) 11.91%.

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To find the YTM, enter PV = –$1,022.50; PMT = $60; N = 14; FV = $1,000; CPT → I/Y = 5.76%. Now multiply by 2 for the semiannual coupon payments: (5.76)(2) = 11.52%.

honeycfa

A five-year bond with a 7.75% semiannual coupon currently trades at 101.245% of a par value of $1,000. Which of the following is closest to the current yield on the bond?

A) 7.65%.

B) 7.53%.

C) 7.75%.

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The current yield is computed as: (Annual Cash Coupon Payment) / (Current Bond Price). The annual coupon is: ($1,000)(0.0775) = $77.50. The current yield is then: ($77.50) / ($1,012.45) = 0.0765 = 7.65%.