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In: Accounting

Mirha Corp has outstanding bonds with 10 years left to maturity and 5 years left of...

Mirha Corp has outstanding bonds with 10 years left to maturity and 5 years left of call protection. The bonds have a coupon rate of 10%, par value of $1,000, and a call price of $1100. The bonds are currently selling for $1,365. If interest rates remain at current levels, what yield should an investor wishing to hold the bond long-term expect to earn?

Solutions

Expert Solution

Answer : Calculation of Yield to maturity and yield to call :

(a.) Calculation of Yield to maturity :

Yield to maturity can be calculated using Rate Function of Excel :

Using Financial Calculator

=RATE(nper,pmt,pv,fv)

where nper is Number of years to maturity i.e 10

pmt is Interest payment i.e 1000 * 10% =100

pv is Current Market Price

= - 1365

Note : pv should be taken as negative.

fv is face value i.e 1000

=RATE(10,100,-1365,1000)

therefore ,Yield to maturity is 5.22%

Calculation of Yield to Call

Using Financial Calculator

=RATE(nper,pmt,pv,fv)

where nper is Number of years to call i.e 5

pmt is Interest payment i.e 1000 * 10% = 100

pv is Current Market Price

= - 1365

Note : pv should be taken as negative.

fv is call price i.e 1100

=RATE(5,100,-1365,1100)

therefore ,Yield to Call is 3.72%

Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM and the issuer has the risht to decide whether to call or not.

ekkarill92 answered 2 years ago
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