Again, Inc. bonds have a par value of $1,000, a 29 year maturity, and an annual...

Again, Inc. bonds have a par value of $1,000, a 29 year maturity, and an annual coupon rate of 12.0% with annual coupon payments. The bonds are currently selling for $1,177. The bonds may be called in 6 years for 112.0% of par. What quoted annual rate of return do you expect to earn if you buy the bonds and company calls them when possible? Question 14 options: 11.91% 10.10% 8.71% 9.56% 12.92%

Expert Solution

YTC is the Rate at which PV of Cash Inflows till bond is called are equal to price of bond today.

Year	CF	PVf @8%	Disc CF	PVF @9%	Disc CF
0	$ -1,177.00	1.0000	$ -1,177.00	1.0000	$ -1,177.00
1	$ 120.00	0.9259	$ 111.11	0.9174	$ 110.09
2	$ 120.00	0.8573	$ 102.88	0.8417	$ 101.00
3	$ 120.00	0.7938	$ 95.26	0.7722	$ 92.66
4	$ 120.00	0.7350	$ 88.20	0.7084	$ 85.01
5	$ 120.00	0.6806	$ 81.67	0.6499	$ 77.99
6	$ 120.00	0.6302	$ 75.62	0.5963	$ 71.55
6	$ 1,120.00	0.5835	$ 653.51	0.5470	$ 612.68
NPV			$ 31.25		$ -26.01

YTC = Rate at which least +ve NPV + [ NPV at that Rate / Change in NPV due to 1% inc in Disc Rate ] * 1%

= 8% + [ 31.25 / 57.27 ] * 1%

= 8% + 0.55%

= 8.55% it may variable based on disc Rate gap is considered. 8.71% is near to 8.55%

option C is correct

jeff jeffy answered 7 months ago

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