Walmart's bonds currently sell for $1,250. They pay a $90 annual coupon, have a 25-year maturity,...

Walmart's bonds currently sell for $1,250. They pay a $90 annual coupon, have a 25-year maturity, and a $1,000 par value, but they can be called in 5 years at $1,050. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. What is the difference between this bond's YTM and its YTC? (Subtract the YTC from the YTM; it is possible to get a negative answer.)

Expert Solution

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k] + Par value/(1 + YTM)^N

k=1

K =25

1250 =∑ [(9*1000/100)/(1 + YTM/100)^k] + 1000/(1 + YTM/100)^25

k=1

YTM% = 6.88

K = Time to call

Bond Price =∑ [(Annual Coupon)/(1 + YTC)^k] + Call Price/(1 + YTC)^Time to call

k=1

K =5

1250 =∑ [(9*1000/100)/(1 + YTC/100)^k] + 1050/(1 + YTC/100)^5

k=1

YTC% = 4.26

YTM-YTC = 6.88-4.26=2.62%

jeff jeffy answered 4 months ago

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