Canadian Securities Course (CSC) Level 1 Practice Exam

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How would you calculate the YTM on a semi-annual bond trading below par with a coupon and maturing at par?

  1. Find price change per coupon, subtract from coupon amount, divide by purchase price and par value, then multiply by 100

  2. Sum coupon and price, divide by bond life, multiply by 2

  3. Subtract purchase price from coupon, divide by compounding periods, multiply by 100

  4. Multiply the coupon rate by the price change per period, divide by bond life, then adjust for purchase price and par value

The correct answer is: Find price change per coupon, subtract from coupon amount, divide by purchase price and par value, then multiply by 100

The correct choice involves a calculation that effectively finds the yield to maturity (YTM) for a semi-annual bond trading below par. Yield to maturity represents the overall return a bondholder can expect if the bond is held until it matures. To calculate the YTM, we focus on the actual cash flows an investor will experience. This includes the bond's coupon payments and any capital appreciation or depreciation experienced if the bond is purchased below its par value. Finding the price change per coupon allows for the adjustment of returns based on the investment’s purchase price relative to its par value. The coupon amount provides the regular income stream, which, when paired with the capital gain from buying the bond at a discount, presents a clearer view of the yield. By dividing this result by the bond's purchase price, you obtain the yield as a percentage. Multiplying by 100 converts this figure into a percentage format, allowing for an easier understanding of the yield relative to the bond’s market price. Overall, this calculation comprehensively conveys the expected returns, taking into account both the income from coupons and the price difference due to purchasing the bond below its par value.

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