Question

A(n) 9.0 %, 25-year bond has a par value of $1,000 and a call price of $1,025. (The bond's first call date is in 5 years.) Coupon payments are made semiannually (so use semiannual compounding where appropriate). a. Find the current yield, YTM, and YTC on this issue, given that it is currently being priced in the market at $ $1,150. Which of these 3 yields is the highest? Which is the lowest? Which yield would you use to value this bond? Explain. b. Repeat the 3 calculations above, given that the bond is being priced at $800. Now which yield is the highest? Which is the lowest? Which yield would you use to value this bond? Explain.

Answer 1

	FV	1000
	Coupon rate	0.09
	Coupon amount	45
	N	50
	Years to call	10
	Call price	1025
	Price of bond=PV	1150
1	Current yield=Coupon/Price	7.83%
2	YTM- Semiannual	3.82%
	YTM	7.65%
3	YTC-Semiannual	2.96%
	YTC	5.93%
4	The Current yield is highest and YTC is lowest
	The YTC will be used to value this bond because since YTC is lowest, it is likely to be called by the issuer.

	FV	1000
	Coupon rate	0.09
	Coupon amount	45
	N	50
	Years to call	10
	Call price	1025
	Price of bond=PV	800
1	Current yield=Coupon/Price	11.25%
2	YTM- Semiannual	5.72%
	YTM	11.44%
3	YTC-Semiannual	7.60%
	YTC	15.21%
4	The YTC is highest and Current yield is lowest
	The YTM will be used to value this bond because since YTM is lower than YTC, it is NOT likely to be called by the issuer and is likely to be held till maturity