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CFA Level I · CFA Level I Exam · Fixed-Income Bond Valuation: Prices and Yields

An investor buys a two-year, 4% annual-coupon bond with par value of 100 at a price that gives a yield-to-maturity of 5%. Assuming the yield stays at 5% and the first coupon is received at the end of year one, the investor's rate of return over the first year is closest to:

The one-year return is about 5.00%. When the yield stays constant, the price rise from 98.14 to 99.05 plus the 4 coupon gives a total return equal to the yield-to-maturity. Current yield and coupon rate ignore the capital gain.

  1. A4.00%
  2. B4.08%
  3. C5.00%Correct

Explanation

Purchase price = 4/1.05 + 104/1.1025 = 98.14. After one year the price is 104/1.05 = 99.05, and the coupon is 4. Return = (99.05 + 4)/98.14 - 1 = 5.00%. The 4.08% is the current yield (4/98.14), which ignores the price gain, and 4.00% is merely the coupon rate.

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