Question

Arnot International’s bonds have a current market price of $1,200. he bonds have an 11% annual coupon payment, a $1,000 face value, and 10 years left until maturity. The bonds may be called in 5 years at 109% of face value (call price = $1,090). (12 points)

1. What is the yield to maturity?

2. Why is the yield to call if they are called in 5 year?

3. Which yield might investors expect to earn on these bonds, and why?

4. The bond’s indenture indicates that the call provision gives the firm the right to call them at the end of each year beginning in Year 5. In Year 5, they may be called at 109% of face value, but in each of the next 4 years the call percentage will decline by 1 percentage point. Thus, in Year 6 they may be called at 108% of face value, in Year 7 they may be called at 107% of face value, and so on. If the yield curve is horizontal and interest rates remain at their current level, when is the latest that investors might expect the firm to call the bond?

Answer 1

RATE in excel =RATE(npr,pmt,pv,fv)

c) Which yield might investors expect to earn on these bonds, and why?

YTM > YTC, the bond issuer will call bond to his best interest, so issuer prefer YTC because it lower. so, investors expect to earn on YTC.

d)

After 7years the yield to call is more than YTM (8.02%).so YTC is lower than YTM in year 7.is latest

Investors might expect the firm to call the bond in year 7