Question

Please show work and explain. Also, can I use TVM in the TI-83+ to solve?

5-8: Thatcher Corporation’s bonds will mature in 10 years. The bonds have a face value of $1,000 and an 8% coupon rate, paid semiannually. The price of the bonds is $1,100. The bonds are callable in 5 years at a call price of $1,050.

What is their yield to maturity?

What is their yield to call?

Answer 1

YTM is the rate at which PV of Cash Inflows are equal to Bond price. CF are considered till maturity.

YTC is the rate at which PV of Cash Inflows are equal to Bond price. CF are considered till bond is called back.

YTM:

YTM = Rate at which least +ve NPV + [ NPV at that rate / chnage in NPV due to 0.5% change ] * 0.5%

= 3%+ [ 48.810 / 77.70 ] * 0.5%

= 3% + 0.63*0.5%

= 3% + 0.31%

= 3.31%

YTM per anum = 3.31% * 2

= 6.62%

YTC:

YTC = Rate at which least +ve NPV + [ NPV at that rate / chnage in NPV due to 0.5% change ] * 0.5%

= 3%+ [ 22.51 / 45.48] * 0.5%

= 3% + 0.49*0.5%

= 3% + 0.25%

= 3.25%

YTC per anum = 3.25% * 2

= 6.50%