Chapter 10 – Bond Prices and Yields
1. The price schedule is as follows:
2. The bond is issued at a price of $800. Therefore, its yield to maturity is 6.8245%. [n =
10; PV = –800; FV = 1,000; PMT = 40] Using the constant yield method, we can
3.
a. The yield to maturity of the par bond equals its coupon rate, 8.75%. All
else equal, the 4% coupon bond would be more attractive because its
coupon rate is far below current market yields, and its price is far below
the call price. Therefore, if yields fall, capital gains on the bond will not be
4. True. Under the expectations hypothesis, there are no risk premia built into bond
5. If the yield curve is upward sloping, we cannot conclude that investors expect short-term
6.
7. Uncertain. Lower inflation usually leads to lower nominal interest rates.
8.
a. We summarize the forward rates and current prices in the following table:
1
10.0%
$909.09
2 11.0% 12.01% $811.62
3 12.0% 14.03% $711.78
Year 1
Price: 1,000/(1 + 10%) = 909.09
Year 2
Price: 1,000/(1 + 11%)2 = 811.62
value at the forward rates derived in part (a):
Maturity
(years) Price
1
$892.78
[ = 1,000/1.1201]
2 $782.93 [ = 1,000/(1.1201 1.1403)]
Chapter 10 – Bond Prices and Yields
c. Next year, the two-year zero will be a one-year zero, and it will therefore
sell at: $1000/1.1201 = $892.78
Similarly, the current three-year zero will be a two-year zero, and it will
sell for: $782.93
yield method are obtained by discounting bond payments at the original 8%
yield to maturity and simply reducing maturity by one year at a time:
P0 = $705.46
First Year
Constant yield price,
P1
‘
= $711.89, so imputed taxable interest over the
P1
‘
Tax on capital gain = 30% $81.40 = $24.42
Total taxes = $22.57 + $24.42 = $46.99
c. After-tax HPR =
$ 50 + ($793.29 － $ 705 .4 6 ) －$46.99
$ 70 5.46
Therefore, the $705.46 investment grows to $900.32 after two years.
705.46 (1 + r)2 = 900.32 r = 0.1297 = 12.97%
e. Coupon received in first year: $50.00
Tax on coupon @ 40% – 20.00
Tax on imputed interest (40% $6.43) – 2.57
TOTAL $829.97
Thus, after two years, the initial investment of $705.46 grows to $829.97:
705.46 (1 + r)2 = 829.97 r = 0.0847 = 8.47%
CFA 1
Answer:
CFA 2
Chapter 10 – Bond Prices and Yields
CFA 3
CFA 4
Chapter 10 – Bond Prices and Yields
CFA 5
Answer:
(3) Realized compound yield (horizon yield) is affected by the forecast of
reinvestment rates, holding period, and yield of the bond at the end of
the investor’s holding period.