Price and Yield Calculations on the Series 7 Exam - dummies

Price and Yield Calculations on the Series 7 Exam

By Steven M. Rice

For the debt securities portion of the Series 7 exam, you need to know something about to determine bond prices and yields. Make sure you understand which type of bond the question is talking about prior to answering because there are many differences.

Practice questions

  1. A 6% corporate bond is trading at 101. What yield could an investor expect if purchasing the bond at the current price and holding it ten years until maturity?

    A. 4.76%

    B. 5%

    C. 5.24%

    D. 6%

    Answer: A. 4.76%

    To find the yield, use this formula:

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    The annual interest is $60 because it has a 6 percent coupon rate, and par value is $1,000 (6 percent of $1,000 = $60). Because this bond was purchased at a premium, you have to determine the annual amortization by taking the difference between the purchase price and par value and dividing it by the ten years until maturity.

    image1.jpg

    Now plug in the numbers to calculate the yield:

    image2.jpg

  2. A 4% bond is purchased at 92 with 25 years until maturity, What is the current yield?

    A. 3.65%

    B. 4%

    C. 4.35%

    D. 4.66%

    Answer: 4.35%

    To determine the current yield of a bond, you have to divide the annual interest by the market price. The annual interest is $40 (4 percent x 1,000 par), and the market price is $920 (92 percent x 1,000 par):

  3. ABC Corporate Bonds are quoted at 101-3/8. How much would an investor purchasing ten of these bonds pay?

    A. $1,013.75

    B. $1,013.80

    C. $10,137.50

    D. $10,138.00

    Answer: C. $10,137.50

    The first thing you have to do is convert the fraction to a decimal. So a bond trading at 101-3/8 would convert to a bond trading at 101.375 (3/8 = 0.375). Next, you have to remember that these $1,000 par value bonds aren’t actually trading at 101.375. The 101.375 is a percentage of par, so the bonds are actually trading at (101.375%)($1,000 par) = $1,013.75.

    Next, because the investor is purchasing ten of these bonds, you have to multiply your answer by 10: ($1,013.7)(10 bonds) = $10,137.50.