CFA Level 1 - Fixed Income Session 16 - Reading 66 - LOS a

CFA Level 1 - Fixed Income Session 16 - Reading 66 - LOS a (Notes, Practice Questions, Sample Questions) 1. A bond has a par value of $1,000, a time to maturity of 20 years, a coupon rate of 10% with interest paid annually, a current price of $850, and a yield to maturity (YTM) of 12%. If the interest payments are reinvested at 10%, the realized compounded yield on this bond is: A) 10.00%. B) 10.9%. (Explanation: The realized yield would have to be between the reinvested rate of 10% and the yield to maturity of 12%) C) 12.0%. 2. A 30-year, 12% bond that pays interest annually is discounted priced to yield 14%. However, interest payments will be invested at 12%. The realized compound yield on this bond must be: A) greater than 14.0%. B) 12.0%. C) between 12.0% and 14.0% (Explanation: Since you are reinvesting the current income at 12%, you will have a return of at least 12%. And since the bond is priced to yield 14%, you will earn no more than 14%) 3. If an investor holds a bond for a period less than the life of the bond, the rate of return the investor can expect to earn is called: A) approximate yield. B) expected return, or horizon return. (Explanation: The horizon return is the total return of a given horizon such as 5 years on a ten year bond) C) bond equivalent yield 4. An investor purchased a 10-year zero-coupon bond with a yield to maturity of 10% and a par value of $1,000. What would her rate of return be at the end of the year if she sells the bond? Assume the yield to maturity on the bond is 9% at the time it is sold and annual compounding periods are used. A) 16.00%. B) 15.00%. C) 19.42% (Explanation: Purchase price: I = 10; N = 10; PMT = 0; FV = 1,000; CPT → PV = 385.54 Selling price: I = 9; N = 9; PMT = 0; FV = 1,000; CPT → PV = 460.43 % Return = (460.43 ? 385.54) / 385.54 × 100 = 19.42%) 5. A 6-year annual interest coupon bond was purchased one year ago. The coupon rate is 10% and par value is $1,000. At the time the bond was bought, the yield to maturity (YTM) was 8%. If the bond is sold after receiving the first interest payment and the bond's yield to maturity had changed to 7%, the annual total rate of return on holding the bond for that year would have been: A) 7.00%. B) 8.00%. C) 11.95% (Explanation: Price 1 year ago N = 6, PMT = 100, FV = 1,000, I = 8, Compute PV = 1,092 Price now N = 5, PMT = 100, FV = 1,000, I = 7, Compute PV = 1,123 % Return = (1,123.00 + 100 ? 1,092.46)/1,092.46 x 100 = 11.95%) 6. An investor purchased a 6-year annual interest coupon bond one year ago. The coupon interest rate was 10% and the par value was $1,000. At the time he purchased the bond, the yield to maturity was 8%. If he sold the bond after receiving the first interest payment and the yield to maturity continued to be 8%, his annual total rate of return on holding the bond for that year would have been: A) 8.00%. (Explanation: Purchase price N = 6, PMT = 100, FV = 1,000, I = 8 compute PV = 1,092.46 Sale price N = 5, PMT = 100, FV = 1,000, I = 8 compute PV = 1,079.85 % return = [(1,079.85 - 1,092.46 + 100) / 1,092.46] x 100 = 8%) B) 7.82%. C) 9.95%.