Interpret Bond Yield Relationships - Securities Industry Essentials SIE

1. Identify the bond status when coupon rate is less than the required yield (YTM).

   Bond sells at a discount (price $<$ par). A lower coupon than YTM necessitates a price below par to boost the effective yield through capital gain.

2. Identify the price status if a bond has a $7\%$ coupon rate and a $6\%$ required yield (YTM).

   Premium (price $>$ par). Coupon rate above YTM leads to premium pricing as the bond offers higher-than-required payments.

3. What is the formula for annual coupon payment given par value and coupon rate?

   $\text{Annual coupon}=\text{par}\times\text{coupon rate}$. The annual coupon is determined by multiplying the bond's face value by its stated coupon rate.

4. Calculate current yield for a bond with $40 annual coupon and $800 market price.

   $5\%$. Current yield is annual coupon over market price, resulting in 5% for this discount bond.

5. Which bond has greater interest rate risk: a lower-coupon bond or higher-coupon bond?

   Lower-coupon bond has greater interest rate risk. Lower coupons weight cash flows toward maturity, increasing duration and thus interest rate risk.

6. What is the formula for current yield on a bond using annual coupon dollars and market price?

   $\text{Current yield}=\frac{\text{annual coupon}}{\text{market price}}$. Current yield calculates the bond's annual income return relative to its current market value, ignoring time to maturity.

7. Identify the bond status when coupon rate is greater than the required yield (YTM).

   Bond sells at a premium (price $>$ par). A higher coupon than YTM makes the bond more attractive, requiring a price above par to equalize returns.

8. Which yield measure is defined as the yield assuming the bond is called at the first call date?

   Yield to call (YTC). YTC assumes early redemption at the call price, calculating the yield based on cash flows up to the call date.

9. Which bond's price changes more for a given rate move: $3\%$ coupon or $8\%$ coupon (same maturity)?

   $3\%$ coupon bond changes more. The 3% coupon bond has higher duration due to deferred cash flows, increasing rate sensitivity.

10. What happens to a discount bond's price as it approaches maturity, assuming yield is unchanged?

    It moves up toward par ($100$). As maturity approaches, the discount accretes via price increase to achieve par value at redemption.

11. Which option states the inverse relationship among bond price, yield, and market interest rates?

    Price and yield move inversely; rates up $\rightarrow$ prices down, yields up. Bond prices fall when market interest rates rise to align yields with new rates, creating an inverse relationship.

12. Find the annual coupon dollars for a $\$1{,}000$ par bond with a $6\%$ coupon rate.

    $60. Annual coupon dollars equal the par value multiplied by the coupon rate percentage.

13. Which bond has greater interest rate risk: a longer-maturity bond or shorter-maturity bond?

    Longer-maturity bond has greater interest rate risk. Longer maturities extend the duration of cash flows, amplifying price sensitivity to interest rate changes.

14. What happens to a premium bond's price as it approaches maturity, assuming yield is unchanged?

    It moves down toward par ($100$). As maturity nears, the premium amortizes through price decline to reach par value at redemption.

15. Which bond's price changes more for a given rate move: $30$-year or $5$-year maturity (same coupon)?

    $30$-year bond changes more. The 30-year bond has longer duration, causing greater price volatility from interest rate shifts.

16. Find the semiannual coupon dollars for a $\$1{,}000$ par bond with a $6\%$ coupon rate.

    $30. Semiannual coupon dollars are half the annual coupon for bonds paying interest twice per year.

17. What is the relationship between YTM and coupon rate for a bond priced at a premium?

    YTM $<$ coupon rate. For premium bonds, YTM is below the coupon rate due to the capital loss as price declines to par at maturity.

18. Which yield measure is defined as annual coupon divided by current market price?

    Current yield. Current yield simplifies return calculation by relating annual interest to the bond's prevailing market price.

19. Which yield measure is defined as the bond's internal rate of return if held to maturity?

    Yield to maturity (YTM). YTM represents the discount rate that equates the bond's present value of cash flows to its current price if held to maturity.

20. What is the relationship between YTM and coupon rate for a bond priced at a discount?

    YTM $>$ coupon rate. For discount bonds, YTM exceeds the coupon rate to account for the capital gain realized at maturity.

21. What is the formula for semiannual coupon payment given par value and annual coupon rate?

    $\text{Semiannual coupon}=\frac{\text{par}\times\text{coupon rate}}{2}$. Semiannual payments split the annual coupon into two equal parts for bonds paying interest twice yearly.

22. Calculate current yield for a bond with $60 annual coupon and $\$1{,}200$ market price.

    $5\%$. Current yield uses the annual coupon divided by market price, yielding 5% for this premium bond.

23. Identify the price status if a bond has a $4\%$ coupon rate and a $6\%$ required yield (YTM).

    Discount (price $<$ par). Coupon rate below YTM results in discount pricing to compensate with potential capital appreciation.

24. Identify the bond status when coupon rate equals the required yield (yield to maturity).

    Bond sells at par ($100$). When coupon rate equals YTM, the bond's cash flows match market requirements, pricing it at face value.

25. Calculate current yield for a bond with $50 annual coupon and $\$1{,}000$ market price.

    $5\%$. Current yield is computed by dividing the annual coupon payment by the bond's market price.

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