In: Finance
It is now January 1, 2019, and you are considering the purchase
of an outstanding bond...
It is now January 1, 2019, and you are considering the purchase
of an outstanding bond that was issued on January 1, 2017. It has a
9% annual coupon and had a 15-year original maturity. (It matures
on December 31, 2031.) There is 5 years of call protection (until
December 31, 2021), after which time it can be called at 108—that
is, at 108% of par, or $1,080. Interest rates have declined since
it was issued, and it is now selling at 111.55% of par, or
$1,115.50.
- What is the yield to maturity? Do not round intermediate
calculations. Round your answer to two decimal places.
%
What is the yield to call? Do not round intermediate
calculations. Round your answer to two decimal places.
%
- If you bought this bond, which return would you actually earn?
- Investors would expect the bonds to be called and to earn the
YTC because the YTC is greater than the YTM.
- Investors would not expect the bonds to be called and to earn
the YTM because the YTM is greater than the YTC.
- Investors would not expect the bonds to be called and to earn
the YTM because the YTM is less than the YTC.
- Investors would expect the bonds to be called and to earn the
YTC because the YTC is less than the YTM.
- Suppose the bond had been selling at a discount rather than a
premium. Would the yield to maturity have been the most likely
return, or would the yield to call have been most likely?
- Investors would not expect the bonds to be called and to earn
the YTM because the YTM is less than the YTC.
- Investors would expect the bonds to be called and to earn the
YTC because the YTC is greater than the YTM.
- Investors would expect the bonds to be called and to earn the
YTC because the YTC is less than the YTM.
- Investors would not expect the bonds to be called and to earn
the YTM because the YTM is greater than the YTC.