Question

A firm's bonds have a maturity of 14 years with a $1,000 face value, have an 8% semiannual coupon, are callable in 7 years at $1,074.44, and currently sell at a price of $1,137.92. What are their nominal yield to maturity and their nominal yield to call? Do not round intermediate calculations. Round your answers to two decimal places.

What return should investors expect to earn on these bonds?

A. Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM.

B. Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC.

C. Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC.

D. Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.

Part B:

Madsen Motors's bonds have 24 years remaining to maturity. Interest is paid annually, they have a $1,000 par value, the coupon interest rate is 7%, and the yield to maturity is 10%. What is the bond's current market price? Round your answer to the nearest cent.

Answer 1

Hence, yield to maturity is 6.49% (3.24%*2)

Hence, yield to call is 6.39% (3.19%*2)

Hence, correct option is "D. Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM"

Part B:

Hence, Bond price is $730.46