CFA Practice Question

CFA Practice Question

A bond has an annual coupon rate of 5% and a face value of $1000 and 10 years to maturity. The coupons are paid semi- annually. The bond also makes a balloon payment of $200 at the end of the 5th year (in addition to the normal coupon payment). The semi-annual (six monthly) rate of return (YTM) for the bond is 3% (this rate of return is for all cash flows received from owning this bond). What would be the change in price of the bond in one years time (that is when there are 9 years left to maturity) if the yield to maturity (YTM) remained the same?
A. $13.19
B. $14.68
C. $15.39
Explanation: To find the bond price today, find the price of two parts separately and add. First part is the bond (no balloon). Second part is the payment of $200 five years later. Now repeat this process for a bond with 9 years to maturity and balloon payment after 4 years.

User Contributed Comments 5

User Comment
chantal help ???
neworizon hope that there will be no balloons in the real exam!
VikramJ N=20,I=3%,PMT=25,FV=1000, CPT PV of 925.61. Then discount the balloon as 200/(1.03^10)=148.82.

A year later its N=18,I=3%,PMT=25,FV=1000, CPT PV of 931.23. Balloon is 200/(1.03^8)=157.88.

(931.23+157.88)-(925.61+148.82)= 14.67
Kathkun Thank you very much Vikram, balloons arent gonna surprise me on the exam day.
Shanax17 Thanks Vikram! I ain't gonna be surprised by balloons too! :)
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