Fixed Income - Fixed Income Section 1

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41. A bond offers an annual coupon rate of 6%, with interest paid quarterly. The bond matures in three years. At a market discount rate of 5%, the price of this bond per $100 of par value is closest to:

  • Option : C
  • Explanation : Using a financial calculator, compute the present value as:
    N = 3 * 4 = 12, I/Y = 5/4 = 1.25%, PMT = 6/4 = 1.5, and FV =100, CPT PV = ($102.76).
    Since the coupon rate is higher than the market rate, the bond is trading at a premium.
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42. A zero coupon bond with a face value of $500 matures in 10 years. At a market discount rate of 5% and assuming annual compounding, the price of the bond is closest to:

  • Option : B
  • Explanation : Value of zero − coupon bond =Face value/(1 + coupon rate)N = 500/(1.05)10 = $306.96
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43. The market value of a 20-year zero-coupon bond with a maturity value of $100 discounted at a 15% annual interest rate with semi- annual compounding is closest to:

  • Option : C
  • Explanation : FV = 100; PMT = 0; 1/Y = 15/2 = 7.5; N = 20 * 2 = 40; CPT PV = $5.54.
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44. Analyst 1: A bond is priced at premium when the coupon rate is greater than the market discount rate. A bond is priced at discount when the coupon rate is less than the market discount rate.
Analyst 2: A bond is priced at premium when the coupon rate is less than the market discount rate. A bond is priced at discount when the coupon rate is more than the market discount rate.
Which analyst’s statement is most likely correct?

  • Option : A
  • Explanation : A bond is priced at premium when the coupon rate is greater than the market discount rate. A bond is priced at discount when the coupon rate is less than the market discount rate.
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45. A 1-year, semiannual-pay bond has a $1,000 face value and a 10% coupon. Which of the following statements is most accurate?

  • Option : B
  • Explanation : If coupon rate is equal to market discount rate, the bond is priced at par. If coupon rate is more than the market discount rate, the bond is priced at a premium. If coupon rate is less than the market discount rate, the bond is priced at discount.
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