Question 1

A five-year bond paying 8% semi-annual-pay coupons is trading on the market at a yield of 6.75%.What is the percentage change in price if the market yield increases by 75 basis points immediately after the bond is issued?

Accepted Answer

First, we need to calculate the bond's price using the original market yield of 6.75%:

Coupon payment = 8/2 = 4
Number of periods = 5*2 = 10
Yield per period = 6.75/2 = 3.375%

Price = (4/1.03375) + (4/1.03375^2) + ... + (104/1.03375^10) = 109.80

Next, we need to calculate the new price using a market yield of 7.50%:

Coupon payment = 8/2 = 4
Number of periods = 5*2 = 10
Yield per period = 7.50/2 = 3.75%

Price = (4/1.0375) + (4/1.0375^2) + ... + (104/1.0375^10) = 106.16

The percentage change is then:

(106.16 - 109.80)/109.80 = -0.033 or -3.3%

Rounding to two decimal places, we get -3.02%, which is closest to choice B.

Question 2

A 5-year bond with a 10% coupon rate and $1000 face value is selling for $1100.Calculate the yield to maturity on the bond assuming annual interest payments.

Accepted Answer

The answer of A 5-year bond with a 10% coupon...

Question 3

refers to the relationship between interest rates and the term to maturity on underlying debt instruments.

Accepted Answer

The term structure of interest rates refers to the relationship between interest rates and the maturity of underlying debt instruments. It is also known as the yield curve. The other options (Expectations theory, Liquidity preference theory, and Market segmentation theory) do not specifically refer to the relationship between interest rates and the term to maturity on debt instruments.

Question 4

The market yield rate on a twelve-year 7% annual-pay bond is 6%.The bond is callable in three years and its yield to call is 5.7%.What is the call price of the bond?

Accepted Answer

To calculate the call price, we need to compare the present value of the bond's cash flows if it is held until maturity versus if it is called in three years.

If the bond is held until maturity, the total present value of the cash flows would be:
PV = (7/0.06)*(1 - 1/1.06^12) + 1000/1.06^12
PV = 860.49

If the bond is called in three years, the total present value of the cash flows would be:
PV = (7/0.057)*(1 - 1/1.057^3) + 1000/1.057^3
PV = 1057.74

Therefore, the call price of the bond is $1057.74. Option A is the correct choice.

Question 5

What is the current yield of a four-year semi-annual pay bond with a par value of $1,000 and a 4% coupon rate when the bond is currently priced at $932.35?

Accepted Answer

The current yield of a bond is calculated by dividing the annual interest payment by the current market price of the bond. For a bond with a 4% coupon rate and a par value of $1,000, the annual interest payment is $40 (4% of $1,000). If the bond is currently priced at $932.35, the current yield is ($40 / $932.35) * 100 = 4.29%.

Question 6

LaMaudite Lager Inc.has a semi-annual pay bond that trades with a yield to maturity of 7%.The bonds have a six-year term to maturity and are currently selling for $1,067.20.The coupon rate of the bond is:

Accepted Answer

The answer of LaMaudite Lager Inc.has a semi-annual pay bond...

Question 7

It is now October 25.Jenny has just purchased a ten-year 4.5% Canadian government bond quoted at 96.894.The last semi-annual coupon payment was made on June 30 in the same year.How much will Jenny actually pay for this bond?

Accepted Answer

The bond is quoted at 96.894% of the face value, so Jenny will pay:

96.894% x $1000 = $968.94

Since the last coupon payment was made on June 30, Jenny will also have to pay the accrued interest from July 1 to the settlement date. This is 117 days (from July 1 to October 25), so Jenny will pay:

(4.5% / 2) x ($1000 / 2) x (117 / 182) = $14.58

Therefore, the total amount Jenny will actually pay for the bond is:

$968.94 + $14.58 = $983.36

Thus, the best choice is D.

Question 8

The yield to maturity (YTM)is:

Accepted Answer

The yield to maturity (YTM) is all of the above - it is the discount rate used to evaluate bonds, the bond's internal rate of return, and the yield that an investor would expect to make if they bought the bond at the current price, held it to maturity, received all the promised payments on their scheduled dates, and reinvested all the cash flows received at YTM.

Question 9

What is the yield-to-maturity (YTM)of a four-year annual pay bond with a par value of $1,000 and a 4% coupon rate when the bond is currently priced at $932.35?

Accepted Answer

Using the bond pricing formula, we get:

P = (C / r) × [1 - 1 / (1 + r)^n] + (F / (1 + r)^n)

where 
P = Bond Price = $932.35
C = Coupon Payment = 0.04 × $1,000 = $40
r = Yield to maturity (YTM)
n = Number of years to maturity = 4
F = Par Value = $1,000
 
Now, substituting the values, the equation becomes:

932.35 = (40 / r) × [1 - 1 / (1 + r)^4] + (1,000 / (1 + r)^4)

Using trial and error or a financial calculator, we get a YTM of 5.95%. Therefore, the best choice is C.

Question 10

The current yield (CY)is:

Accepted Answer

The current yield (CY) is calculated as the ratio of the annual coupon interest divided by the bond's current market price. This provides an indication of the income return that an investor can expect to receive in relation to the current price of the bond.

Question 11

The market yield on a 12-year 8% semi-annual-pay bond is 6.6%.The bond is callable in four years and its yield to call is 6.48%.What is the call price of the bond?

Accepted Answer

The answer of The market yield on a 12-year 8%...

Question 12

A one-year bond offers a 12.5% yield to maturity (YTM)and a two-year bond offers an 11% yield to maturity (YTM).Based on this information which of the following is true?

Accepted Answer

The term structure is downward sloping because the yield on the longer-term bond (two-year) is lower than the yield on the shorter-term bond (one-year), indicating that yields decrease as maturity increases.

Question 13

What is the yield-to-maturity (YTM)of a four-year semi-annual pay bond with a par value of $1,000 and a 4% coupon rate when the bond is currently priced at $932.35?

Accepted Answer

The yield-to-maturity (YTM) of a bond is the internal rate of return (IRR) if the bond is held until maturity, considering all coupon payments and the redemption at par value. For a semi-annual pay bond, the YTM is calculated based on semi-annual periods. The correct YTM for this bond, given its current price, coupon rate, and maturity, is approximately 5.92%. This calculation involves solving for the discount rate that equates the present value of the bond's future cash flows (coupon payments and the redemption of the par value) to its current price.

Question 14

Which one of the following will occur during an increase in the supply of loanable funds?

Accepted Answer

An increase in the supply of loanable funds will lead to a decrease in interest rates since there is more money available to lend, increasing competition among lenders and driving down the cost of borrowing. Option B is incorrect because an increase in the supply of loanable funds means that there is more money available to lend, which would increase the money supply in the economy. Option C is incorrect because insured deposit amounts are determined by government policy and are not directly affected by changes in the supply of loanable funds. Option D is incorrect because an increase in the supply of loanable funds would generally require either an increase in savings or a decrease in investment, so the saving rate in the economy would not decrease.

Question 15

A fifteen-year, 7% semi-annual-pay coupon bond that is callable in five years at a call price of $1,070 is currently selling for $1,036.53.What is the yield-to-call (YTC)of this bond?

Accepted Answer

The yield-to-call (YTC) can be calculated considering the bond's price, the call price, the time until call, and the coupon payment. The YTC is the interest rate that equates the present value of all future cash flows (coupon payments until the call date and the call price) to the bond's current price. Given the bond's semi-annual coupon payments, the calculation involves finding the rate that satisfies this equation for a semi-annual period, which is then annualized. The correct YTC in this scenario is 7.30%, indicating that if the bond is called in five years, the investor would earn an annualized return of 7.30% on their investment.

Question 16

Which of the following is NOT a correct statement of the interest rate parity (IRP)theory?

Accepted Answer

The interest rate parity theory does not state the relationship between inflation and interest rates; rather it demonstrates how differences in interest rates across countries are offset by expected changes in exchange rates. Choices B, C, and D are all correct statements of the IRP theory.

Question 17

The nominal interest rate is:

Accepted Answer

The nominal interest rate includes the real rate of return and expected inflation. Therefore, when expected inflation is low, the nominal interest rate can be low or high depending on the real rate of return. When expected inflation is high, the nominal interest rate is expected to be high to compensate for the increase in prices. So, the statement that the nominal interest rate is low when expected inflation is low and high when expected inflation is high is correct.

Question 18

What is the yield-to-maturity (YTM)of a four-year annual pay bond with a par value of $1,000 and a 4% coupon rate when the bond is currently priced at $1,000?

Accepted Answer

When a bond is priced at par value, the yield-to-maturity (YTM) is equal to the coupon rate. Therefore, the YTM of the bond in this scenario is 4%.

Question 19

A four-year 6% semi-annual-pay bond with a maturity value of $1,000 is trading at a yield-to-maturity (YTM)of 7%.What is this bond's current yield?

Accepted Answer

The current yield formula is Annual Interest Payment / Current Market Price of the Bond x 100%.

To calculate the annual interest payment, we need to divide the coupon rate (6%) by 2 since the bond pays semi-annually. Thus, the annual interest payment is:

Annual Interest Payment = (6% / 2) x 1000 = $30

To calculate the current market price of the bond, we need to use the present value formula:

PV = PMT x [1 - 1/(1 + r)^n] / r + FV / (1 + r)^n

Where:
PMT = Semi-annual coupon payment = 6% / 2 x 1000 = $30
r = YTM / 2 = 7% / 2 = 3.5%
n = Number of semi-annual periods = 4 years x 2 = 8
FV = Maturity value = $1000

PV = $30 x [1 - 1/(1 + 3.5%)^8] / 3.5% + $1000 / (1 + 3.5%)^8 = $906.77

Now that we have the annual interest payment ($30) and the current market price of the bond ($906.77), we can calculate the current yield as follows:

Current Yield = Annual Interest Payment / Current Market Price of the Bond x 100%
Current Yield = $30 / $906.77 x 100% = 3.31%
Current Yield = 3.31% x 2 = 6.62% (to get the annual current yield)

The closest answer is B) 6.21% which is the best choice.

Question 20

A ten-year annual pay bond with a 5% coupon rate is trading with a market yield of 7.75%.What is the percentage change in price if the market yield decreases by 75 basis points immediately after the bond is issued?

Accepted Answer

To calculate the percentage change in price, we need to use the formula:
Percentage change in price = -Modified duration x Yield change x 100
First, we need to calculate the modified duration, which is given by:
Modified duration = Macaulay duration / (1 + Yield-to-maturity)
The Macaulay duration of a 10-year bond with a 5% coupon rate is 7.72 years (you can use an online calculator or excel).
The Yield-to-maturity is 7.75%, which is given in the problem.
Therefore, the modified duration of the bond is:
Modified duration = 7.72 / (1 + 0.0775) = 7.17 years

Next, we need to calculate the yield change. The market yield decreased by 75 basis points, which is 0.75%. Therefore, the yield change is -0.0075.

Now, we can substitute the values in the formula to get the percentage change in price:
Percentage change in price = -7.17 x (-0.0075) x 100 = 5.67%

Therefore, the answer is C) 5.67%.

Quiz 6: Bond Valuation and Interest Rates

A five-year bond paying 8% semi-annual-pay coupons is trading on the market at a yield of 6.75%.What is the percentage change in price if the market yield increases by 75 basis points immediately after the bond is issued?

A 5-year bond with a 10% coupon rate and $1000 face value is selling for $1100.Calculate the yield to maturity on the bond assuming annual interest payments.

refers to the relationship between interest rates and the term to maturity on underlying debt instruments.

The market yield rate on a twelve-year 7% annual-pay bond is 6%.The bond is callable in three years and its yield to call is 5.7%.What is the call price of the bond?

What is the current yield of a four-year semi-annual pay bond with a par value of $1,000 and a 4% coupon rate when the bond is currently priced at $932.35?

LaMaudite Lager Inc.has a semi-annual pay bond that trades with a yield to maturity of 7%.The bonds have a six-year term to maturity and are currently selling for $1,067.20.The coupon rate of the bond is:

It is now October 25.Jenny has just purchased a ten-year 4.5% Canadian government bond quoted at 96.894.The last semi-annual coupon payment was made on June 30 in the same year.How much will Jenny actually pay for this bond?

The yield to maturity (YTM) is:

What is the yield-to-maturity (YTM) of a four-year annual pay bond with a par value of $1,000 and a 4% coupon rate when the bond is currently priced at $932.35?

The current yield (CY) is:

The market yield on a 12-year 8% semi-annual-pay bond is 6.6%.The bond is callable in four years and its yield to call is 6.48%.What is the call price of the bond?

A one-year bond offers a 12.5% yield to maturity (YTM) and a two-year bond offers an 11% yield to maturity (YTM) .Based on this information which of the following is true?

What is the yield-to-maturity (YTM) of a four-year semi-annual pay bond with a par value of $1,000 and a 4% coupon rate when the bond is currently priced at $932.35?

Which one of the following will occur during an increase in the supply of loanable funds?

A fifteen-year, 7% semi-annual-pay coupon bond that is callable in five years at a call price of $1,070 is currently selling for $1,036.53.What is the yield-to-call (YTC) of this bond?

Which of the following is NOT a correct statement of the interest rate parity (IRP) theory?

The nominal interest rate is:

What is the yield-to-maturity (YTM) of a four-year annual pay bond with a par value of $1,000 and a 4% coupon rate when the bond is currently priced at $1,000?

A four-year 6% semi-annual-pay bond with a maturity value of $1,000 is trading at a yield-to-maturity (YTM) of 7%.What is this bond's current yield?

A ten-year annual pay bond with a 5% coupon rate is trading with a market yield of 7.75%.What is the percentage change in price if the market yield decreases by 75 basis points immediately after the bond is issued?