In: Finance
Last year Carson Industries issued a 10-year, 15% semiannual coupon bond at its par value of $1,000. Currently, the bond can be called in 6 years at a price of $1,075 and it sells for $1,280.
YTM: %
YTC: %
Would an investor be more likely to earn the YTM or the YTC?
%
Is this yield affected by whether the bond is likely to be called?
%
Is this yield dependent on whether the bond is expected to be called?
answer a)
Bond Yield Example Data | |
Face Value | $ 1,000 |
Annual Coupon Rate | 15.000%*$1000= $ 150 (annual) = $75 (semiannual) |
Selling price of bond | $1280 |
Years to Maturity | 10.00 |
Years to Call | 6.0 |
Call Premium % | 7.50%, ( $1075 value at call) |
Payment Frequency | 2 |
YTM = RATE(20,75,-1280,1000)*2 = 10.43%
similarly , YTC = RATE(12,75,-1280,1075)*2 = 9.69%
as YTM > YTC , investor would like to earn YTM
Answer 2) Option IV. If the bond is called, the current yield will remain the same but the capital gains yield will be different.
Explain: Current yield is free from time.
Answer 3)capital gain or Loss is calculated by
CGY ( annual) = ((Future price / current price)^1/n -1
Bond price change from , $1075 to $ 1000 in 4 remaining years ,
CGY = (1000/1075)^0.25-1 = (1.79%)
Answer 4) Option V : The expected capital gains (or loss) yield for the coming year depends on whether or not the bond is expected to be called.
Explain: the expected capital gain depend on value of bond change with call