Scan QR code or get instant email to install app
Question:
An investor is considering the purchase of Security X, which matures in ten years and has a par value of SI,000. During the first five years, X has a 6% coupon with quarterly payments. During the remaining five years, X has an 8% coupon with quarterly payments. The face value is paid at maturity. A second 10-year security, Security Z, has a 6% semiannual coupon and is selling at par. Assuming that X has the same bond equivalent yield as Z, the price of Security X is closest to:
A
$1,067.
explanation
1212The bond equivalent yield rate on the par bond (Z) is 6% or a 3% semiannual rate. The equivalent quarterly rate, 
. Security X makes 20 quarterly payments of 15 and 20 quarterly payments of 20. We need to use the cash flow function as follows: CFQ - 0; CFj = 15; Fj = 20; CF9 = 20; CF3 = 1,020;
F3 = 1; I = 1.4889; CPT -> NPV = 1,067.27. Note that CF3 contains the final quarterly payment of 20 along with the 1,000 face value payment.
Take more free practice tests for other PASSEMALL topics with our cfa practice questions now!
Related Information
Comments