Question

9. A 7.5% coupon, semiannual-pay, five-year bond has a yield to maturity of 6.80%. over the next year, if the bond’s yield to maturity remains unchanged, its price will:

A. increase.

B. decrease.

C. remain unchanged.

D. Cannot be determined.

E. None of the above.

10. 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.

11. Jack Long, CFA, is evaluating the retirement account of John Smith. Smith currently has $500,000 and will retire in 12 years. If Smith needs $2 million at retirements, the return required is closest to:

A. 11.0%

B. 10.0%

C. 12.25%.

D. 13.0%

E. None of the above.

12. Michelle is thinking about two different investments options each for 4 years and interest rate is 5% annually: Option A: Receive four end of year payments each of $3,000. Option B: Receive four payments of $2,000, $3,000, $5,000 and $2,000 for the first, second, third and fourth year respectively. Which option has the higher present value?

A. Option A

B. Option B

C. Both options have the same present value

D. Cannot be determined

E. None of the above.

Answer 1

9) B. Decrease
Since coupon rate is more than YTM , the price of bond must be greater than face value today. As bond approaches maturity , it's price moves towasrd face value , hence next year if YTM remians constant, price of bond will decrease

10) 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 $

11) C. 12.25%

Here formula of future value can be used
Future value = Present value(1+r)^n
Future value = 2000000 $
Present Value = 500000 $
r = rate of interest = ?
n = no. of years = 12
2000,000 = 500,000(1+r)^12
4 = (1+r)^12
4^(1/12) = 1 + r
1.1225 = 1+ r
r = 1.1225-1
= 0.1225
= 12.25%

12) A. Option A

Statement showing NPV of option A

Year	Cash flow	PVIF @ 5%	PV
	A	B	C = A x B
1	3000.00	0.9524	2857.14
2	3000.00	0.9070	2721.09
3	3000.00	0.8638	2591.51
4	3000.00	0.8227	2468.11
Sum of PV of cash inflow	10637.85

Sum of PV of cash inflow of option A = NPV = $10637.85

Statement showing NPV of option B

Year	Cash flow	PVIF @ 5%	PV
	A	B	C = A x B
1	2000.00	0.9524	1904.76
2	3000.00	0.9070	2721.09
3	5000.00	0.8638	4319.19
4	2000.00	0.8227	1645.40
Sum of PV of cash inflow	10590.44

Sum of PV of cash inflow of option B = NPV = $10590.44

Thus NPV of option A is higher than option B