In: Finance
9.
A firm's bonds have a maturity of 14 years with a $1,000 face value, have an 11% semiannual coupon, are callable in 7 years at $1,230.20, and currently sell at a price of $1,394.19. 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.
YTM: %
YTC: %
What return should investors expect to earn on these bonds?
Yield to maturity(YTM):
Semiannual rate is 3.316996%.
YTM = 3.316996%*2 = 6.63%.
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Yield to call(YTC):
Semiannual rate = 3.268988%.
YTC = 3.268988%*2 = 6.54%.
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Answer: Option 3.
Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.