This Exam FM sample reference tests Bond Pricing and Yields. For a discount bond, the principal portion of coupon 12 is the excess of yield interest Ci over coupon 35, discounted from the final period. Setting that accumulation equal to 7 and solving over nine periods gives redemption C = 1193.33, choice C.
These notes identify the calculation error associated with each wrong letter when that error is reproducible.
AChoice A (673) does not satisfy the coupon-12 discount-accumulation progression to the final-period yield-interest excess; no distinct standard one-step error is identifiable.
BChoice B (799) does not satisfy the coupon-12 discount-accumulation progression to the final-period yield-interest excess; no distinct standard one-step error is identifiable.
DChoice D (1344) does not satisfy the coupon-12 discount-accumulation progression to the final-period yield-interest excess; no distinct standard one-step error is identifiable.
EChoice E (1540) does not satisfy the coupon-12 discount-accumulation progression to the final-period yield-interest excess; no distinct standard one-step error is identifiable.
Original practice · fully worked
Original variant: specified-coupon discount accumulation from known bond terms
A sixteen-period bond pays 30 each period, redeems 1,200, and yields 4% per period. Calculate the accumulation of discount included in payment 6.
A 11.69
B 12.28
C 12.86
D 13.45
E 14.03
Variant answer in brief
The final-period yield-interest excess is 1,200 times 4% minus 30, or 18. Moving eleven progression positions back to payment 6 gives discount accumulation 11.69, choice A.
Setup
Setup
Compute the final-period discount accumulation as yield interest on redemption less coupon.
A16=1200(0.04)−30=18
Model
Model
Discount that amount through n minus k plus 1 progression positions to payment 6.
A6=A16(1.04)−(16−6+1)
Compute
Compute
The payment-6 accumulation is 11.692457.
A6=11.69245677
Answer
Answer
The discount accumulation is 11.69, selecting choice A.
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