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In: Finance

A firm's bonds have a maturity of 14 years with a $1,000 face value, have an...

A firm's bonds have a maturity of 14 years with a $1,000 face value, have an 8% semiannual coupon, are callable in 7 years at $1,075.62, and currently sell at a price of $1,139.11. 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 expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.
  2. Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM.
  3. Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC.
  4. Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC.

Solutions

Expert Solution

Par Value =1000
Semi Annual Coupon =8%*1000/2 =40
Number of Periods =14*2 =28
Price =1139.11
Par value =1000
Semi annual YTM
N=28;PMT =40;PV=-1139.11;FV=1000;CPT I/Y =3.237%
a) Nominal YTM =2*3.237% =6.47%

b)Call Price =1075.62
Number of Periods of Call =2*7 =14
Semi annual YTM
N=14;PMT =40;PV=-1139.11;FV=1075.62;CPT I/Y =3.1895%
a) Nominal YTM =2*3.1895% =6.38%

c) Option I is correct option.


jeff jeffy answered 2 years ago
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