Worked solution · Exam FM
This Exam FM sample reference tests Bond Valuation. Coupon amount is 500i, so Bond A's price simplifies to 500(1 + vᵐ) = 800 and vᵐ = 0.6; Bond B then costs 500(1 + 0.6³) = 608, choice C.
Independent solution
Setup
The coupon rate is half the yield, making the annual coupon amount 500 times i.
Model
Use i times the annuity factor equals one minus the terminal discount factor to simplify Bond A's price.
Compute
The derived m-year discount factor is 0.6; cube it for Bond B's three-times-longer term.
Answer
Bond B's price is 608, corresponding to choice C.
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Original practice · fully worked
An m-year face-1,000 bond has price 800 and annual coupon rate equal to half its annual effective yield. Determine the discount factor through maturity.
The coupon-yield relation reduces price to 500(1 + vᵐ); setting this to 800 gives vᵐ = 0.60, choice C.
Setup
Translate the coupon-rate condition into annual coupon amount 500i.
Model
Replace i times the annuity factor by one minus the maturity discount factor.
Compute
The bond-price equation becomes linear in that factor.
Answer
The discount factor through maturity is 0.60, corresponding to choice C.
Keep practicing
These references share syllabus concepts or sit nearby in the official sequence. All 96 Exam FM bonds practice problems.
Drill the method: Exam FM Bond Valuation, Pricing, and Yields problems
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