Question

1. A Treasury bond has a 10% annual coupon and a 10.5% yield to maturity. Which of the following statements is CORRECT? *

A. The bond sells at a price below par.

B. The bond has a current yield less than 10%.

C. The bond sells at a discount.

D. A & C

E. None of the above.

2. J&J Company's bonds mature in 10 years, have a par value of $1,000, and make an annual coupon interest payment of $75. The market requires an interest rate of 8% on these bonds. What is the bond's price? *

A. $966.45

B. $925.62

C. $948.76

D. $972.48

E. None of the above.

3. Film Co. non-callable bonds currently sell for $1,150. They have a 10-year maturity, an annual coupon of $100, and a par value of $1,000. What is their yield to maturity? *

A. 5.84%

B. 6.15%

C. 6.47%

D. 7.91%

E. None of the above.

4. Tosh. Inc.'s bonds currently sell for $980 and have a par value of $1,000. They pay a $95 annual coupon and have a 12-year maturity, but they can be called in 3 years at $1,150. What is their yield to call (YTC)? *

A. 13.9%

B. 14%

C. 7.12%

D. 14.24%

E. None of the above.

5. TNT Inc. bonds currently sell for $1,100. They have a 5-year maturity, an annual coupon of $85, and a par value of $1,000. What is their current yield? *

A. 7.73%

B. 7.50%

C. 7.91%

D. 8.12%

E. None of the above.

Answer 1

1) D. A & C

When YTM (in our case it is 10.5%) is more than coupon rate , the bond trades below it's book value. Thus at discount

2) A. $966.45

Here face value = $1000 ,
Interest = face value x coupon rate
=75 $
n = no of coupon payments= 10
YTM = 8%
Value of bond = Interest x PVIFA(YTM%,n) + redemption value x PVIF(YTM%,n)
PVIFA(YTM%,n) = [1-(1/(1+r)^n / r ]
PVIFA(8%,10) = [1-(1/(1+8%)^10 / 8%]
=[1-(1/(1+0.08)^10 / 0.08]
=[1-(1/(1.08)^10 / 0.08]
=[1-0.46319 / 0.08]
=0.5368/0.08
=6.7101
PVIF(8%,10) = 1/(1+8%)^10
=1/(1.08)^10
= 0.46319
Value of bond = 75 x 6.7101 + 1000 x 0.46319
=503.26 + 463.19
= 966.45 $

3) D. 7.91%

Here face value = $1000 ,
Interest = 100 $
n = no of coupon payments= 10
Current Market price = 1150 $
YTM = Interest +(Face value -current market price/n) / (Face value + current market price/2)
= 100 + (1000-1150)/10 / (1000+1150)/2
=100 + (-150/10) / 2150/2
= 100 -15 / 1075
= 85/1075
= 0.0791
i.e 7.91%

4) D. 14.24%

Interest = 95 $
n = call period= 3
Call price = 1150 $
Market price = 980
YTC = Interest +(Call price - current market price/n) / (Call price + current market price/2)
= 95 + (1150-980)/3 / (1150+980)/2
=95 + (170/3) / 2130/2
= 95 + 56.67 / 1065
= 151.67/1065
= 0.1424
i.e 14.24%

5) A. 7.73%

Current yield = Interest / Current market price

= 85/1100

=0.0773

=7.73%