A. 8.28%
B. 7.28%
C. 6.28%
Answer：B
Use the calculator to calculate YTM:
N=10, PMT=70, FV=1000, PV=-980.74 CPT -> 1/Y=7.28
Use the calculator to calculate YTM:
N=10, PMT=70, FV=1000, PV=-980.74 CPT -> 1/Y=7.28
2. Consider the three bonds in the following table. Which of the three bonds is most likely to have the greatest reinvestment risk?
| Bond | YTM | Time to Maturity | Current Price |
| A | 8% | 15 | $980 |
| B | 8% | 15 | $1,000 |
| C | 8% | 15 | $1,098 |
A. Bond A
B. Bond B
C. Bond C
Answer：C
The yield to maturity assumes the coupon payments are reinvested at the yield to maturity and the bond will be held until maturity.
The bond selling at a premium has the highest coupon rate and thus is expected to earn the most reinvestment income.
If the reinvestment rate falls, this bond will suffer the greatest loss.
Therefore Bond C, which is currently selling at premium, is most likely to have the greatest reinvestment risk.
The yield to maturity assumes the coupon payments are reinvested at the yield to maturity and the bond will be held until maturity.
The bond selling at a premium has the highest coupon rate and thus is expected to earn the most reinvestment income.
If the reinvestment rate falls, this bond will suffer the greatest loss.
Therefore Bond C, which is currently selling at premium, is most likely to have the greatest reinvestment risk.
3. Using the U.S. Treasury forward provided in the following table, the value of a 2 year, 100 par value Treasury bond with a 4% coupon rate is closes to:
| Period | Years | Forward Rate |
| 1 | 0.5 | 1.1% |
| 2 | 1.0 | 1.7% |
| 3 | 1.5 | 2.2% |
| 4 | 2.0 | 2.5% |
A. $104.20
B. $100
C. $98.74
Answer：A
According to the definition of the forward rate, the value of the bond=
According to the definition of the forward rate, the value of the bond=
4. Using the BEY (bond-equivalent yield) spot rates for U.S. Treasury yields provided in the following table, the 6-month forward rate one year from now on a bond-equivalent yield basis is closest to:
| Period | Years | Spot Rate |
| 1 | 0.5 | 1.40% |
| 2 | 1.0 | 2.30% |
| 3 | 1.5 | 3.00% |
| 4 | 2.0 | 3.50% |
B. 2.20%
C. 2.30%
Answer：A
Assume:
xfy represents x-period forward rate y-period from now;
Z x+y represents (x+y)-period spo
We have (1+Z x+y)x+y=(1+Zy)y (1+xfy)x
6-month forward rate one year from now in this case is 1 period forward rate 2-period from now.
All spot rates are given on a BEY basis and must be divided by 2 in the calculation:
(1+1f 2)1 (1+0.023/2)2=(1+0.03/2)3
1f 2=0.022038
On a BEY basis, the forward rate is 0.022038*2=4.41%
Assume:
xfy represents x-period forward rate y-period from now;
Z x+y represents (x+y)-period spo
We have (1+Z x+y)x+y=(1+Zy)y (1+xfy)x
6-month forward rate one year from now in this case is 1 period forward rate 2-period from now.
All spot rates are given on a BEY basis and must be divided by 2 in the calculation:
(1+1f 2)1 (1+0.023/2)2=(1+0.03/2)3
1f 2=0.022038
On a BEY basis, the forward rate is 0.022038*2=4.41%
5. Elaine Wong has purchased an 8%
coupon bond for $1,034.88 with 3 years to maturity. At what rate must the coupon payments be reinvested to produce a 5% yield-to-maturity rate?
A. 8%
B. 6.5%
C. 5%
Answer：C
C is correct. Yield-to-maturity measure assumes that the coupon payments can be reinvested at the yield-to-maturity.
In this case, it’s 5%. C is the correct answer.
