Question

1. A 5% coupon bond pays interest semiannually and has 15 years left until maturity. Its face value is $1000, and it is currently selling for $900. Its yield to maturity is:

   		6.67%
   		5.49%
   		6.02%
   		3.02%
   		4.55%

1. An 8% coupon bond pays interest semiannually and has 6 years left until maturity. Its face value is $1000, and it is currently selling for $1072. Would you purchase this bond if your required rate of return on the bond were 5.4%?

   		No, because the price of $1072 is higher than the fair price of $1031.75.
   		Yes, because the yield on the bond is 6.53%, which is greater than the required rate.
   		No, because the price of $1072 is lower than the fair price of $1131.75.
   		No, because the yield on the bond is only 3.27%, which is less than the required rate.
   		Yes, because the price of $1072 is lower than the fair price of $1088.20.

2. A 9% coupon bond pays interest annually and has 5 years left until maturity. Its face value is $1000, and it is currently selling for $1085. What rate of return do investors require of this bond today?

   		6.93%
   		7.18%
   		8.09%
   		7.61%
   		7.42%

Answer 1

Q-1)

Calculating the Semi-annual Yield To Maturity of Bond using Excel "RATE" function:-

Semi-annual YTM = 3.0109%

Annual YTM = 3.0109%*2 = 6.02%

Option C

Q-2)

Face Value of Bond = $1000

Current price of Bond = $1072

Your Required return is 5.4%

Calculating the Required return(or YTM) provided by Bond at price of $1072 using Excel "RATE" function:-

So, Semi-annual YTM = 3.2652%

Annual YTM = 3.2652%*2 = 6.53%

So, Required Return(or Annual YTM) provided by Bond is 6.53% while investor require a Yield of 5.2%.

Thus, it is beneficail for investor to Purchase the Bond as Bond provide higher Yield than Investor's required.

Option 2. Yes, because the yield on the bond is 6.53%, which is greater than the required rate

Q-3)

Calculating the Annual Yield To Maturity of Bond using Excel "RATE" function:-

So, Annual YTM is 6.93%

Option 1

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