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Q1. The expected rate of return on a bond if bought at its current market price and held to maturity.
a. current yield
b. coupon yield
c. capital gains yield
d. yield to maturity
Q2. When the market's required rate of return for a particular bond is much less than its coupon rate, the bond is
selling at:
a. face value.
b. a discount.
c. a premium.
d. cannot be determined without more information.
Q3. If a bond sells at a high premium, then which of the following relationships hold true?
(P0 represents the price of a bond and rd is the bond's required rate of return (required yield to maturity.)
a. P0 < par and rd > the coupon rate.
b. P0 > par and rd > the coupon rate.
c. P0 > par and rd < the coupon rate.
d. P0 < par and rd < the coupon rate.
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Exercise n°1: Nominal Yield to maturity
A $100 face value bond has a current market price of $93.5, an 8 percent coupon rate, and 10
years remaining until maturity. Interest payments are made semiannually.
a. Before you do any calculations, decide whether the yield to maturity is above or below the
coupon rate. Why?
b. What is the semiannual yield to maturity on this bond?
c. Using your answer to Part (b), what is the bond’s annual yield to maturity?
Exercise n°6: Determining coupon rate and bond pricing between 2 coupon dates
On January 1st, 2016 a Company’s outstanding bonds have a $100 par value and mature in 5
years. Their yield to maturity is 9% and they pay semiannual interest. Their current market price is
$85.361 (on January 1st, 2016).
1- What is the bond's annual coupon interest rate i?
2- What would be the bond’s price on October 13, 2017? (assume the YTM remains the same)
3- What is its clean price on October 13, 2017?
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