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FRM Part I · FRM Exam Part I · Bond Yields and Return Calculations

A 2-year annual-pay bond with a face value of USD 1,000 and 5% coupon is priced at USD 1,000 minus a discount so that its price is USD 981.47. Which is closest to its yield to maturity (annual compounding)?

The yield to maturity is closest to 6.0%. Discounting the USD 50 coupon and USD 1,050 final payment at 6% gives a price near USD 981.6, matching the quoted price. A 5% yield would price the bond at par.

  1. A5.0%
  2. B5.5%
  3. C6.0%Correct
  4. D6.5%

Explanation

At 6%: 50/1.06 + 1050/1.1236 = 47.17 + 934.46 = 981.63, roughly 981.47 within rounding of the yield near 6.0%. At 5.5%, the price would be about 990.8, and at 5% it would be 1,000. So 6.0% is the closest.

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