CFA Question 1 A portfolio manager is considering the purchase of a bond with a 5.5% coupon rate that pays interest annually and matures in three years. Source: Petitt, Pinto, and Pirie (2015) Hint: You can simply calculate the bond price. However, there is a smarter way which we look at in Q2 below. Q1 Unanswered (10 points) If the required rate of return on the bond is 5%, the price of the bond per 100 of par value is closest to... (Hint: In CFA questions, the yield to maturity and required rate of return on a bond are often used interchangeably). 98.65 101.36 106.43 Q2 Unanswered (10 points) We know that since the coupon rate is higher than the yield, the bond is trading at a (premium/discount) and should have a price (greater/smaller) than $100. eliminates That (A/B/C) as an answer. (10 points) We know that if the yield was 5.5% instead of 5%, the price of the bond would be ($100/101.36/106.43) as it would be trading at (par/discount). modified duration of the We also know that the bond is (greater/less) than 3. This means that a decline in the yield from 5.5% to 5% has at most an effect on the price of 3 x 500 basis points = (0.5%/1.5% 2.5%). This means that the price after the yield change is at most (101.5/106.43). Thus, the price in (A/B/C) is too answer. high and it cannot be the This leaves only (A/B/C) as the correct answer. Submit