Question

1. A firm has a bond issue with face value of $1,000, 8% coupon rate, and eight years to maturity. The bond makes coupon payments every six months, and is currently priced at $1,055.85. What is the yield to maturity on this bond?

Select one: a. 3.54% b. 6.95% c. 7.07% d. 7.49% e. 14.99%

2. What is the duration of a five-year bond with coupon rate of 8%, yield to maturity of 6%, semi-annual coupon payment, and face value of $1,000?

Select one: a. 3.80 years b. 3.95 years c. 4.20 years d. 4.25 years e. 8.51 years

3.

The yield on a 10-year bond is 6.5%. The 30-day T-bill yield is 3.5%, while the inflation rate is estimated to be 2.5%. What is the real rate of return on the bond based on the exact Fisher Effect formula?

Select one: a. 3.00% b. 3.90% c. 4.00% d. 6.50% e. 9.16%

Answer 1

Interest rate per semiannually (8%/2)				4.00%
yield to maturity per semiannually (6%/2)				3.00%
Interest paid per semiannually (1000*4%)				$                  40
Last payment (40+1000 principal)				$            1,040
Period (T)	Cash Flow	PV factor @ 3%	Present value	Weight (Present value * Period)
1	$          40	0.9708738	38.83	38.83
2	$          40	0.9425959	37.70	75.41
3	$          40	0.9151417	36.61	109.82
4	$          40	0.8884870	35.54	142.16
5	$          40	0.8626088	34.50	172.52
6	$          40	0.8374843	33.50	201.00
7	$          40	0.8130915	32.52	227.67
8	$          40	0.7894092	31.58	252.61
9	$          40	0.7664167	30.66	275.91
10	$    1,040	0.7440939	773.86	7,738.58
Total			1,085.30	9,234.50
Duration in semi annual period (9234.50/1085.30)				8.5087
Duration in yearly period (8.5087/2)				4.25
Correct option is				D

(1+Real rate of Return) = (1+ Nominal rate) / (1+Inflation rate)
(1+Real rate of Return) = (1+ 0.065) / (1+ 0.025)
(1+Real rate of Return) = 1.065/1.025
1+Real rate of Return = 1.0390
Real rate of Return = 1.0390 - 1
Real rate of Return = 0.039
Real rate of Return = 3.90%
Real rate of Return = 3.90%	3.90%
Correct option is	B