Bond Pricing Quiz

What is the formula to calculate yield to maturity?

• Net Present Value (NPV) formula

• Payback Period formula

• Discounted Cash Flow (DCF) formula

• Internal Rate of Return (IRR) formula

Answer explanation

The formula to calculate yield to maturity is the Discounted Cash Flow (DCF) formula. It is used to determine the rate of return on a bond or other fixed-income investment. This formula takes into account the present value of future cash flows and the current market price of the investment.

A bond with a coupon rate of 5% and a face value of $1,000 is currently trading at $950. What is the yield to maturity?

• 5.53%

• 6.25%

• 3.85%

• 4.75%

Answer explanation

The yield to maturity is the rate of return anticipated on a bond if it is held until it matures. In this case, the bond is trading at a discount, which means the yield to maturity will be higher than the coupon rate. The correct choice is 5.53%.

What is the coupon rate of a bond that pays an annual coupon of $80 and has a face value of $1,000?

• 8%

• 10%

• 15%

• 5%

Answer explanation

The coupon rate of the bond is 8%. It is calculated by dividing the annual coupon payment of $80 by the face value of $1,000 and multiplying by 100.

A bond has a duration of 5 years. If interest rates increase by 1%, what is the approximate percentage change in the bond's price?

• -5%

• 10%

• -1%

• 0%

Answer explanation

When interest rates increase, bond prices decrease. The approximate percentage change in the bond's price can be calculated using the duration. As the duration is 5 years, the bond's price will decrease by approximately 5%.

What is the duration of a zero-coupon bond with a maturity of 10 years?

• 20 years

• 5 years

• 10 years

• 1 year

Answer explanation

The duration of a zero-coupon bond with a maturity of 10 years is 10 years. This is because the duration of a zero-coupon bond is equal to its maturity. Therefore, the correct choice is 10 years.

A zero-coupon bond with a face value of $1,000 is currently trading at $800. What is the yield to maturity?

• 0.2

• 0.1

• 0.3

• 0.5

Answer explanation

The yield to maturity is the rate of return an investor would earn if they held the bond until maturity. In this case, the bond is trading at a discount, so the yield to maturity is higher than the coupon rate. The correct answer is 0.2, which is the highest yield among the answer choices.

What is the formula to calculate the price of a bond?

• Face value of the bond

• Future value of the bond

• Coupon rate multiplied by the face value

• Present value of future cash flows

Answer explanation

The price of a bond is calculated using the present value of future cash flows.

A bond with a face value of $1,000 and a coupon rate of 6% pays semi-annual coupons. If the bond has 5 years remaining until maturity, what is the total number of coupon payments?

• 10

• 15

• 5

• 20

Answer explanation

The bond pays semi-annual coupons, so the total number of coupon payments is equal to the number of years remaining until maturity multiplied by 2. Therefore, the correct answer is 10.

What is the coupon rate of a bond that pays a semi-annual coupon of $40 and has a face value of $500?

• 8%

• 16%

• 12%

• 10%

Answer explanation

The coupon rate of the bond is calculated by dividing the annual coupon payment by the face value. In this case, the annual coupon payment is $80 ($40 x 2) and the face value is $500. Therefore, the coupon rate is 16% (80/500 = 0.16 or 16%). The correct answer is 16%.

A bond has a duration of 8 years. If interest rates decrease by 0.5%, what is the approximate percentage change in the bond's price?

• 2%

• 0%

• -2%

• -4%

Answer explanation

When interest rates decrease, bond prices increase. The approximate percentage change in the bond's price can be calculated using the modified duration formula. For a 0.5% decrease in interest rates, the bond's price would increase by approximately -4%.