QUIZ : Bond prices and Yields / Mnj Investasi MM Nico Gilbert Nathaniel Siagian
217007056 Essay
1. Two bonds have identical time maturity and coupon rates. One callable at 105 and the other at 110.
a. What is the meaning of callable bond
A callable bond is a type of bond that gives the issuer the right to redeem (call) the bond before its maturity date. When a bond is callable, the issuer can choose to buy back the bonds from bondholders at a predetermined price (the call price), which is often higher than the face value of the bond. This call feature benefits the issuer by providing flexibility in managing its debt obligations, especially if interest rates have fallen since the bond was issued. However, it poses a risk to bondholders, as they may face the reinvestment risk of having to find alternative investments if their callable bonds are called.
b. Which should have the higher yield to maturity. And Why?
The yield to maturity is the total return anticipated on a bond if it is held until it matures.
When comparing two bonds with identical time to maturity and coupon rates, but one is callable at 105 and the other at 110, the callable bond with the lower call price (105) will generally have a higher yield to maturity.
2. The stated yield to maturity and realized compound yield to maturity of a (default- free) zero coupon bond will always equal? Why?
A zero-coupon bond has the same values for YTM and realized compound yield because there is no reinvestment rate uncertainty.
2. Why do bond prices go down when interest rates go up? Don’t lenders like the high interest rates?
Bond prices and interest rates have an inverse relationship. When interest rates rise, the prices of existing bonds tend to fall, and vice versa. This phenomenon can be explained through a few key concepts Interest Rate Risk, Opportunity Cost, Discounting Future Cash Flows
4. A bond with an annual coupon rate at 4.8% sells for $970. What is the bond’s current yield?
4,8%(1000) = 48/970 = 4,95%
5.Which security has a higher effective annual interest rate
a. A 3-month T-Bill selling at $97,645 with par value of $100,000
Interest Payment = Par Value - Current Price
In this case, the par value is $100,000, and the current price is $97,645.
Interest Payment = $100,000 - $97,645 = $2,355 Calculate the time to maturity in years:
Time to Maturity (Years) = Time to Maturity (Months) / 12 Since the T-Bill is 3 months, the time to maturity in years is:
Time to Maturity (Years) = 3 months / 12 = 0.25 years Calculate the effective annual interest rate:
Effective Annual Interest Rate = (Interest Payment) / (Current Price * Time to Maturity) Effective Annual Interest Rate = ($2,355) / ($97,645 * 0.25) = 0.0965 = 9.65%
Therefore, the effective annual interest rate of the 3-month T-Bill is 9.65%.
b. A coupon selling at par and paying at 10% coupon semiannually.
To determine the effective annual interest rate of the coupon bond, follow these steps:
Calculate the annual coupon payment:
Annual Coupon Payment = (Coupon Rate) * (Face Value)
Since the coupon rate is 10% and the face value is not provided, assume a face value of
$1,000:
Annual Coupon Payment = (0.10) * ($1,000) = $100
Convert the semiannual coupon payments to annual equivalents:
Annual Equivalent Coupon Payment = 2 * Semiannual Coupon Payment
In this case, the semiannual coupon payment is half of the annual coupon payment:
Semiannual Coupon Payment = $100 / 2 = $50 Therefore, the annual equivalent coupon payment is:
Annual Equivalent Coupon Payment = 2 * $50 = $100 Calculate the effective annual interest rate:
Effective Annual Interest Rate = (Annual Equivalent Coupon Payment) / (Current Price * Time to Maturity)
Since the bond is selling at par, the current price is equal to the face value of $1,000. The time to maturity is not provided, so assume a time to maturity of 1 year:
Effective Annual Interest Rate = ($100) / ($1,000 * 1) = 0.10 = 10%
Therefore, the effective annual interest rate of the coupon bond is 10%.
Multiple Choice Questions
1. Mary just purchased a bond which pays $60 a year in interest. What is this $60 called?
A. coupon B. face value C. discount D. call premium E. yield
2. Bert owns a bond that will pay him $75 each year in interest plus a $1,000 principal payment at maturity. What is the $1,000 called?
A. coupon B. face value C. discount D. yield E. dirty price
3. A bond's coupon rate is equal to the annual interest divided by which one of the following?
A. call price B. current price C. face value D. clean price E. dirty price
4. The specified date on which the principal amount of a bond is payable is referred to as which one of the following?
A. coupon date B. yield date C. maturity D. dirty date E. clean date
5.An indenture is:
A. another name for a bond's coupon.
B. the written record of all the holders of a bond issue.
C. a bond that is past its maturity date but has yet to be repaid.
D. a bond that is secured by the inventory held by the bond's issuer.
E. the legal agreement between the bond issuer and the bondholders.
