Worked solution · Exam FM
This Exam FM sample reference tests Bond Book Value versus Market Value. Book value continues on the acquisition yield basis of 4% per half-year, not the new 3% market yield. Discounting 10 coupons of 35, then 30 coupons of 45 and redemption gives 1017.85, choice C.
Independent solution
Setup
The amortized book value uses the original nominal 8% yield, or 4% per half-year. The quoted 6% current yield would determine market value instead.
Model
After coupon 20, ten coupons of 35 remain before the coupon steps to 45 for the final thirty periods.
Compute
Evaluate all remaining contractual payments on the book-yield curve.
Answer
The book value rounds to 1018, choice C.
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Error diagnosis
These notes identify the calculation error associated with each wrong letter when that error is reproducible.
Original practice · fully worked
A twelve-year 1,000 redemption-value bond pays annual coupons of 40 in years 1 through 6 and 70 in years 7 through 12. At a 5% annual yield, determine the bond's value immediately before the year-5 coupon is paid.
Immediately after the year-4 coupon, the remaining cash flows are worth 1073.4819. Accumulating one year to just before the year-5 coupon gives 1127.1560, choice D.
Setup
First compute the prospective value immediately after coupon 4. Two coupons of 40 remain before six coupons of 70.
Model
The requested instant is one full yield period later, immediately before coupon 5 leaves the bond.
Compute
Evaluate the post-coupon value and accumulate it.
Answer
The pre-coupon value is 1127.16, choice D.
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