Question

A firm's bonds have a maturity of 12 years with a $1,000 face value, have an 11% semiannual coupon, are callable in 6 years at $1,202.29, and currently sell at a price of $1,352.76. 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?

1. Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC.
2. Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.
3. Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM.
4. Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC.

Answer 1

a) calculation of yield to maturity:
Interest (1000*0.11/2)	55
Face value(assumed)	$1000
Bond price	$1352.76
Years to maturity (12*2)	24
Yield=	Interest+ (Face value-Bond price)/years to maturity
	(face value + bond price)/2
	55+(1000-1352.76)/24
	(1000+1352.76)/2
Yield to maturity(semiannual)	3.43%
Yield to maturity(annual)	6.85%
b) calculation of yield to call
Interest (1000*0.11/2)	55
Face value(assumed)	$1000
Call price	1202.29
Years to call (6*2)	12
Yield to call=	Interest+ (Face value-Call price)/years to call
	(face value + call price)/2
	55+(1000-1202.29)/12
	(1000+1202.29)/2
Yield to call(semiannual)	3.46%
Yield to call(annual)	6.92%
Since the YTC is greater than the Ytm so the investors would expect the bond to be called and
to earn the YTC because the YTC is greater than the YTM.
So correct answer is III