Question

1. Assume a bond is currently selling at premium. Which of the following statement is correct if YTM on the bond increases?

Multiple Choice

• It is possible that this bond sells at discount after YTM rises.

• The bond will still sell at premium.

• The coupon payments will be adjusted to the new discount rate.

• The coupon rate of the bond will increase.

2. What is the current price of a $1,000 par value, 6% coupon bond that pays interest semi-annually if the bond matures in 8 years and has a yield-to-maturity of 13%?

Multiple Choice

• $339.61

• $855.57

• $658.13

• $664.09

3. Use the following information, which describes the possible outcomes from investing in a particular asset, to answer the following two

Questions.

State of the Economy	Probability of the States	Percentage Returns
Economic recession	25%	-5%
Moderate economic growth	45%	5%
Strong economic growth	30%	13%

The expected return from investing in the asset is _______.

Multiple Choice

• 5.9

• 4.9

• 3.9

• 4.3

Answer 1

Answer to Question 1:

“It is possible that this bond sells at discount after YTM rises”

Bond is currently selling at premium which means that its coupon rate is higher than YTM. If YTM is increased, it is possible that YTM is higher than coupon rate and as a result of this bond will sell at discount.

Answer to Question 2:

“$658.13”

Par Value = $1,000

Annual Coupon Rate = 6.00%
Semiannual Coupon Rate = 3.00%
Semiannual Coupon = 3.00% * $1,000
Semiannual Coupon = $30

Time to Maturity = 8 years
Semiannual Period = 16

Annual YTM = 13.00%
Semiannual YTM = 6.50%

Current Price = $30 * PVIFA(6.50%, 16) + $1,000 * PVIF(6.50%, 16)
Current Price = $30 * (1 - (1/1.065)^16) / 0.065 + $1,000 * (1/1.065)^16
Current Price = $30 * 9.767764 + $1,000 * 0.365095
Current Price = $658.13

Answer to Question 3:

“4.9”

Expected Return = 0.25 * (-0.05) + 0.45 * 0.05 + 0.30 * 0.13
Expected Return = 0.049 or 4.90%

The expected return from investing in the asset is 4.90%