Question

For a discount bond, its coupon rate is_ than its yield to maturity and its price is expected to __over the years. A B. C. D. Greater; increase Greater; decrease Lower; increase Lower; decrease A corporate bond has a 30-year maturity and pays interest annually. The quoted coupon rate is 10% and the bond is priced at par. The boond is callable in 5 years at 120% of par. What is the bonds yield to call? (Choose the closest one) A B. C D. 10% 12% 13% 15% Everything else equal_ bonds will require a higher promised YTM than bonds. A B. C. D. Secured; unsecured Non-callable; callable Mortgage; debenture BBB rate; AAA rated

Answer 1

1)

Lower; increase

When coupon rate is lower than yield to maturity, bond will always sell at discount. As time move towards its maturity date, price will move towards its face value. Since price will be lower than face value, price will increase over the years

2)

Assuming face value to be $1000

Coupon = 0.1 * 1000 = 100

Price = 120% of 1000 = 1200

Yield to call = 13%

Keys to use in a financial calculator:

FV 1200

PV 1000

PMT 100

N 5

CPT I/Y

3)

D. BBB rate; AAA rated

BBB rating is lower than AAA rating. Therefore, a BBB rated bond has a higher risk. A higher risk will have a higher YTM.