This Exam FM sample reference tests Successive Discount Increments. Book value rises by 252 in coupon 9 and by 270 in the final coupon. Consecutive discount increments grow by one plus the yield, so 1 + i = 270/252 and i = 7.1429%, choice E.
These notes identify the calculation error associated with each wrong letter when that error is reproducible.
AChoice A divides the 252 book-value increase by the 4478 opening book value, using an increment rather than effective interest.
BChoice B divides 270 by 4730, again treating total book-value increase as the period's interest charge.
CChoice C averages the two book values before forming a yield estimate from their difference.
DChoice D uses 270 divided by 4730 plus an approximate coupon adjustment that is not supported by the recurrence.
Original practice · fully worked
Original variant: yield from consecutive premium amortization
For a premium bond, the premium amortized in one annual coupon is 90.00 and the premium amortized in the next coupon is 94.50. Determine the annual effective yield, assuming the effective-interest method.
A 4.50%
B 5.00%
C 5.25%
D 9.00%
E 10.50%
Variant answer in brief
Successive premium-amortization amounts also grow at one plus the yield. The ratio 94.50 divided by 90 is 1.05, so the yield is 5.00%, choice B.
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