# calculate CFA question

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1. The first step is always identifying the components of the bond. Let’s assume
a \$1,000 principal value. Check whether it pays interest annually or
semi-annually.
N = number of periods = 20 (semi-annual interest payments over 20yrs.
PMT = (Interest Rate x Principal)/2 = (1,000 x .04)/2
FV = Amount received at maturity date = 1,000
PV = Principal x Price in this first part I asked the yield to maturity(YTM) if you
bought the bonds. When you buy you pay the offer price (98.50) and when you sell
yo receive the bid price (97.05)
I – solve for YTM and multiply the answer by 2 to adjust it to annualized YTM.
2. I want you to actually calculate the yield-to-call. You are right you adjust N to the
number of periods to the call date.
3. Yes, yield-to-worst will be the lower yield when comparing YTM vs. yield-to-call.
4. I want you to calculate the price of the bond using 2 scenarios. First, increase the
yield-to-maturity by 1% and second reduce it by 1%. Remember to to get the
yield-to-maturity for the calculations use the 10yr US Treasury yield plus the spread
(220 bps or 2.20%). Adjust it up 1% and down 1% and calculate the PV for each.
5. A company adds a call date to protect the company. It gives the company the
power to refinance the bonds if interest rates fall and they can save on interest
expense

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