Worked solution · Exam FM
This Exam FM sample reference tests Bond Pricing and Yields. Bond A gives the common discount factor v to the n = 0.5. Bond B's price then gives annuity factor 10.5721. Bond C's per-par price factor is 0.817164, so par X = 12237.44, choice A.
Independent solution
Setup
Use the zero-coupon bond to obtain the common term discount factor.
Model
Use Bond B's price per unit par to solve the common annuity factor.
Compute
The annuity factor is 10.57213827. Bond C therefore has price factor 0.81716415, giving X = 12237.443387.
Answer
Bond C's par value is approximately 12,240, selecting choice A.
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Original practice · fully worked
A ten-year zero-coupon bond with face 20,000 sells for 12,000. A second ten-year bond has face 15,000, pays 4% annual coupons, and has the same yield. Calculate the second bond's price.
The zero price implies annual yield 5.2410%. Pricing the second bond's ten coupons and redemption at that yield gives 13,579.30, choice B.
Setup
Recover the common annual yield from the zero-coupon price and face.
Model
Price the coupon bond using annual coupon 600 and face 15,000.
Compute
The calibrated yield is 5.240978%, producing price 13579.30.
Answer
The coupon bond price is 13,579.30, selecting choice B.
Calculator reproduction
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