Tutorial 9 Answers

1. The current yield on a bond is equal to ________. 

A. annual interest payment divided by the current market price
B. the yield to maturity
C. annual interest divided by the par value
D. the internal rate of return
E. None of these is correct.

Answer: A

2. If a 7% coupon bond is trading for $975.00, it has a current yield of ____________
percent. 
A. 7.00
B. 6.53
C. 7.24
D. 8.53
E. 7.18

70/975 = 7.18.

3. If a 7.25% coupon bond is trading for $982.00, it has a current yield of ____________
percent. 
A. 7.38
B. 6.53
C. 7.25
D. 8.53
E. 7.18

72.50/982 = 7.38.

4. A coupon bond pays annual interest, has a par value of $1,000, matures in 4 years, has a
coupon rate of 10%, and has a yield to maturity of 12%. The current yield on this bond is
___________. 
A. 10.65%
B. 10.45%
C. 10.95%
D. 10.52%
E. None of these is correct.

FV = 1000, n = 4, PMT = 100, i = 12, PV = 939.25; $100/$939.25 = 10.65%.

5. A coupon bond pays annual interest, has a par value of $1,000, matures in 4 years, has a
coupon rate of 8.25%, and has a yield to maturity of 8.64%. The current yield on this bond is
___________. 
A. 8.65%
B. 8.45%
C. 7.95%
D. 8.36%
E. None of these is correct.

FV = 1000, n = 4, PMT = 82.50, i = 8.64, PV = 987.26; $82.50/$987.26 = 8.36%.

6. Of the following four investments, ________ is considered the safest. 

A. commercial paper
B. corporate bonds
C. U. S. Agency issues
D. Treasury bonds
E. Treasury bills

Only Treasury issues are insured by the U.S. government; the shorter-term the instrument, the
safer the instrument.

7. Of the following four investments, ________ is considered the least risky. 
A. Treasury bills
B. corporate bonds
C. U. S. Agency issues
D. Treasury bonds
E. commercial paper

Only Treasury issues are insured by the U.S. government; the shorter-term the instrument, the
safer the instrument.

8. The ______ is a measure of the average rate of return an investor will earn if the investor
buys the bond now and holds until maturity. 
A. current yield
B. dividend yield
C. P/E ratio
D. yield to maturity
E. discount yield

The yield to maturity is a measure of the average rate of return an investor will earn if the
investor buys the bond now and holds until maturity.

9. A coupon bond that pays interest annually is selling at par value of $1,000, matures in 5
years, and has a coupon rate of 9%. The yield to maturity on this bond is: 
A. 8.0%
B. 8.3%
C. 9.0%
D. 10.0%
E. None of these is correct.
When a bond sells at par value, the coupon rate is equal to the yield to maturity.

10. A coupon bond that pays interest semi-annually is selling at par value of $1,000, matures
in 7 years, and has a coupon rate of 8.6%. The yield to maturity on this bond is: 
A. 8.0%
B. 8.6%
C. 9.0%
D. 10.0%
E. None of these is correct.

When a bond sells at par value, the coupon rate is equal to the yield to maturity.

11. A coupon bond that pays interest annually has a par value of $1,000, matures in 5 years,
and has a yield to maturity of 10%. The intrinsic value of the bond today will be ______ if
the coupon rate is 7%. 
A. $712.99
B. $620.92
C. $1,123.01
D. $886.28
E. $1,000.00

FV = 1000, PMT = 70, n = 5, i = 10, PV = 886.28.

12. A coupon bond that pays interest annually has a par value of $1,000, matures in 7 years,
and has a yield to maturity of 9.3%. The intrinsic value of the bond today will be ______ if
the coupon rate is 8.5%. 
A. $712.99
B. $960.14
C. $1,123.01
D. $886.28
E. $1,000.00

FV = 1000, PMT = 85, n = 7, i = 9.3, PV = 960.138.

13. A coupon bond that pays interest semi-annually has a par value of $1,000, matures in 5
years, and has a yield to maturity of 10%. The intrinsic value of the bond today will be
__________ if the coupon rate is 8%. 
A. $922.78
B. $924.16
C. $1,075.80
D. $1,077.20
E. None of these is correct.

FV = 1000, PMT = 40, n = 10, i = 5, PV = 922.78

14. You purchased an annual interest coupon bond one year ago that now has 6 years
remaining until maturity. The coupon rate of interest was 10% and par value was $1,000. At
the time you purchased the bond, the yield to maturity was 8%. The amount you paid for this
bond one year ago was 
A. $1,057.50.
B. $1,075.50.
C. $1,088.50.
D. $1.092.46.
E. $1,104.13.

FV = 1000, PMT = 100, n = 7, i = 8, PV = 1104.13

15. Consider two bonds, A and B. Both bonds presently are selling at their par value of
$1,000. Each pays interest of $120 annually. Bond A will mature in 5 years while bond B will
mature in 6 years. If the yields to maturity on the two bonds change from 12% to 10%,
____________. 
A. both bonds will increase in value, but bond A will increase more than bond B
B. both bonds will increase in value, but bond B will increase more than bond A
C. both bonds will decrease in value, but bond A will decrease more than bond B
D. both bonds will decrease in value, but bond B will decrease more than bond A
E. None of these is correct.

The longer the maturity, the greater the price change when interest rates change.

16. A zero-coupon bond has a yield to maturity of 9% and a par value of $1,000. If the bond
matures in 8 years, the bond should sell for a price of _______ today. 
A. 422.41
B. $501.87
C. $513.16
D. $483.49
E. None of these is correct.

$1,000/(1.09)8 = $501.87

17. A 10% coupon bond, annual payments, 10 years to maturity is callable in 3 years at a call
price of $1,100. If the bond is selling today for $975, the yield to call is _________. 
A. 10.26%
B. 10.00%
C. 9.25%
D. 13.98%
E. None of these is correct.

FV = 1100, n = 3, PMT = 100, PV = −975, i = 13.98%.

18. A 12% coupon bond, semiannual payments, is callable in 5 years. The call price is
$1,120; if the bond is selling today for $1,110, what is the yield to call? 
A. 12.03%.
B. 10.86%.
C. 10.95%.
D. 9.14%.
E. None of these is correct.

YTC = FV = 1120, n = 10, PMT = 60, PV = −1,110m Þ i = 5.48%, 5.48*2=10.95

19. The duration of a 5-year zero-coupon bond is 

A. smaller than 5.
B. larger than 5.
C. equal to 5.
D. equal to that of a 5-year 10% coupon bond.
E. None of these is correct.

Duration of a zero-coupon bond equals the bond's maturity.

20. An 8%, 15-year bond has a yield to maturity of 10% and duration of 8.05 years. If the
market yield changes by 25 basis points, how much change will there be in the bond's price? 
A. 1.85%
B. 2.01%
C. 3.27%
D. 6.44%
E. None of these is correct.

P/P = (−8.05 X 0.0025)/1.1 = 1.85%

21. A 6%, 30-year corporate bond was recently being priced to yield 8%. The Macaulay
duration for the bond is 8.4 years. Given this information, the bond's modified duration would
be 
A. 8.05
B. 9.44
C. 9.27
D. 7.78
E. None of these is correct.

D* = D/(1 + y); D* = 8.4/(1.08) = 7.78

22. A 9%, 16-year bond has a yield to maturity of 11% and duration of 9.25 years. If the
market yield changes by 32 basis points, how much change will there be in the bond's price? 
A. 1.85%
B. 2.01%
C. 2.67%
D. 6.44%
E. None of these is correct.
P/P = (−9.25 × 0.0032)/1.11 = 2.67%

23. A 7%, 14-year bond has a yield to maturity of 6% and duration of 7 years. If the market
yield changes by 44 basis points, how much change will there be in the bond's price? 
A. 1.85%
B. 2.91%
C. 3.27%
D. 6.44%
E. None of these is correct.

P/P = (−7 × 0.0044)/1.06 = 2.91%