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CFA InstituteCourse
CFA Program Level 1 | Fixed IncomePages
4
Academic year
2023
anon
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CFA Level 1 - Fixed Income Session 16 - Reading 66 - LOS d (Notes, Practice Questions, Sample Questions) 1. Consider a 6-year $1,000 par bond priced at $1,011. The coupon rate is 7.5% paid semiannually. Six-year bonds with comparablecredit quality have a yield to maturity (YTM) of 6%. Should aninvestor purchase this bond? A) Yes, the bond is undervalued by $38. B) Yes, the bond is undervalued by $64. C) No, the bond is overvalued by $64. <Explanation> — FV = 1,000PMT = 37.5N = 12I/Y = 3%CPT PV = 1,074.661,074.66 – 1,011 = 64 2. Sysco Foods has a 10-year bond outstanding with an annual coupon of 6.5%. If the bond is currently priced at $1,089.25,which of the following is closest to the bond-equivalent yield ofthe bond? A) 5.33%.B) 5.42%. C) 5.26%
<Explanation> — First, ﬁnd the annual yield to maturity of thebond as: FV = $1,000; PMT = $65; N = 10; PV = –1,089.25; CPT →I/Y = 5.33%. Then, ﬁnd the BEY as: 2 × [(1 + YTM)0.5 – 1] =0.0526 = 5.26% 3. What is the semiannual-pay bond equivalent yield on an annual-pay bond with a yield to maturity of 12.51%? A) 12.14%. B) 12.00%.C) 12.51% <Explanation> — The semiannual-pay bond equivalent yield ofan annual-pay bond = 2 × [(1 + yield to maturity on theannual-pay bond)0.5 – 1] = 12.14% 4. The yield to maturity for a semiannual-pay, 10-year corporate bond is 5.25%. What is the bond's annual equivalent yield? A) 5.00%. B) 5.32%. C) 5.25% <Explanation> — The annual equivalent yield is equal to [1 +(nominal yield/number of payments per year)]number ofpayments per year – 1 = (1 + 0.0525/2)2 - 1 = 5.32% 5. What is the annual-pay yield for a bond with a bond-equivalent yield of 5.6%? A) 5.60%.B) 5.52%.
C) 5.68% <Explanation> — The annual-pay yield is computed as follows:Annual-pay yield = [(1 + 0.056 / 2)2 – 1 6. What is the bond-equivalent yield given if the monthly yield is equal to 0.7%? A) 8.65%. B) 8.55%. C) 8.40% <Explanation> — The bond equivalent yield (BEY) is computedas follows:BEY = 2 × [(1 + monthly yield)6 ? 1] = 2 × [(1 + 0.007)6 ? 1] =8.55% 7. What is the bond-equivalent yield if the monthly yield is equal to 0.5%? A) 6.08%. B) 6.00%.C) 6.12%. <Explanation> — The bond equivalent yield (BEY) is computedas follows:BEY = 2 × [(1 + monthly yield)6 ? 1] = 2 × [(1 + 0.005)6 ? 1] =6.08% 8. The yield to maturity on an annual-pay bond 5.6%, what is the bond equivalent yield for this bond?
A) 5.43%.B) 5.60%. C) 5.52% <Explanation> — The bond-equivalent yield is computed asfollows:Bond-equivalent yield = 2[(1 + 0.056)0.5 – 1] = 5.52%
CFA Level 1 - Fixed Income Session 16 - Reading 66 - LOS d
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