Worked solution · Exam FM
This Exam FM sample reference tests Bond Pricing and Yields. Write the four-year price with eight half-year cash flows and the two-year price with four. The shorter price is 93% of the longer price; solving that relation gives redemption 455.37, so choice A is correct.
Independent solution
Setup
Use half-year periods with coupon 25 and yield 3% per period.
Model
The hypothetical two-year price is 7% lower than the actual four-year price.
Compute
Substituting both price formulas and isolating C gives redemption 455.3712.
Answer
The redemption value is approximately 455, selecting choice A.
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Original practice · fully worked
A bond pays 30 every half-year, redeems 1,000, and yields 4% nominal annually convertible semiannually. Compare otherwise identical six-year and three-year versions. By what percentage is the three-year price lower than the six-year price?
The six-year and three-year prices are 1105.75 and 1056.01. Their relative difference is 4.50% of the six-year price, choice C.
Setup
Use the 2% half-year yield to price the twelve-period and six-period cash-flow streams.
Model
Measure the price reduction relative to the longer bond's price.
Compute
The prices are 1105.75 and 1056.01, giving reduction 4.4982%.
Answer
The three-year price is 4.50% lower, which is choice C.
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