Question

1. An analyst observes a 5-year, 10% semiannual-pay bond. The face value is $1,000. The analyst believes that the yield to maturity on semiannual bond basis should be 15%. Based on this yield estimate, the price of this bond would be:

A. $828.40

B. $1,189.53

C. $1,193.04

D. $1,180.02

E. None of the above.

2. A bond that matures in 6 years sells for $950. The bond has a face value of $1,000 and a 5.5% annual coupon. What is the bond’s current yield?

A. 5.50%

B. 6.00%

C. 5.79%

D. 6.25%

E. None of the above.

3. A bond that matures in 6 years sells for $950. The bond has a face value of $1,000 and a 5.5% annual coupon. What is the bond’s yield to maturity, YTM?

A. 5.50%

B. 5.79%

C. 6.00%

D. 6.49%

E. None of the above.

4. Sadik Inc.'s bonds currently sell for $1,180 and have a par value of $1,000. They pay a $100 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100. What is their yield to call (YTC)?

A. 6.63%

B. 6.98%

C. 7.35%

D. 7.37%

E. None of the above.

Answer 1

1. Par value of the bond (FV) = $1,000

Coupon rate = 10%/2 = 5% (being semi-annual)

Coupon amount payable per period (PMT) = $1,000 X 5% = $50

Number of periods (NPER) = 5 years X 2 = 10 (being semi-annual)

The YTM of the bond is 15% (given)

Therefore, the YTM of the semi-annual bond = 15%/2 = 7.5%.

Let the price of the bond be PV.

The YTM is calculated in excel using the RATE function as follows:

RATE (NPER, PMT, -PV, FV, 0) = 7.5%

Or, RATE (10, 50, -PV, 1000, 0) = 7.5%

Or, PV = $828.40.

Hence, option A is correct.

2. Current yield is computed as follows:

Annual Interest / Price

= $55 / $950 = 5.79%.

Hence, option C is correct.

3. Par value of the bond (FV) = $1,000

Coupon rate = 5.5%

Coupon amount payable per period (PMT) = $1,000 X 5.5% = $55

The present value of the bond (PV) = -$950

Number of periods (NPER) = 6

Therefore, YTM of the bond is calculated in excel using the RATE function as follows:

RATE (NPER, PMT, PV, FV, 0) = RATE (6, 55, -950, 1000, 0) = 6.53%.

Hence, option E is correct.

4. The yield to call is calculated in excel using the RATE function as follows:

NPER = Time to call = 5 years

Coupon amount payable per period (PMT) = $100

Present value of the bond (PV) = -$1,180

Par value of the bond or callable value (FV) = $1,100

Therefore, YTC = RATE (NPER, PMT, PV, FV, 0) = RATE (5, 100, -1180, 1100, 0) = 7.30%.

Hence, option E is correct.