Question

It is now January 1, 2019, and you are considering the purchase of an outstanding bond that was issued on January 1, 2017. It has an 8.5% annual coupon and had a 30-year original maturity. (It matures on December 31, 2046.) There is 5 years of call protection (until December 31, 2021), after which time it can be called at 108—that is, at 108% of par, or $1,080. Interest rates have declined since it was issued, and it is now selling at 116.57% of par, or $1,165.70.

1. What is the yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places.

     %

   What is the yield to call? Do not round intermediate calculations. Round your answer to two decimal places.

     %

Answer 1

Answer :

(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 28

pmt is Interest payment i.e 1000 * 8.5% =85

pv is Current Market Price

= - 1165.70

Note : pv should be taken as negative.

fv is face value i.e 1000 (Assumed)

=RATE(28,85,-1165.70,1000)

therefore ,Yield to maturity is 7.12%

Calculation of Yield to Call

Using Financial Calculator

=RATE(nper,pmt,pv,fv)

where nper is Number of years to call i.e 3 (5-2)

pmt is Interest payment i.e 1000 * 8.5% =85

pv is Current Market Price

= - 1165.70

Note : pv should be taken as negative.

fv is call price i.e 1080

=RATE(3,85,-1165.7,1080)

therefore ,Yield to Call is 4.96%