Question

In: Economics

Company issued 10-year, 11 percent coupon bond with a par value of $1,000. The bonds may...

Company issued 10-year, 11 percent coupon bond with a par value of $1,000. The bonds may be called in 5 years at a call price of $1,150. The bond currently sells for $1,350.
You are required to answer the following questions:
a) What is the bond's yield to maturity?
b) What is the bond's current yield?
c) What is the bond's capital gain or loss yield?
d) What is the bond's yield to call?
e) If you bought this bond do you think you would be more likely to earn a) the YTM or b) the YTC? (1 mark)
You are required to calculate YTM and YTC by using iterative technique and linear interpolation.

Expert Solution

Solution :-

(A) Time to Maturity ( Nper ) = 10 Years

Annual Coupon ( Pmt ) = $1,000 * 11% = $110

Face Value ( FV ) = $1,000

Price of Bond ( PV ) = $1,350

Now Yield to Maturity ( YTM ) =

Therefore Yield to maturity = 6.20%

(b) Current Yield = Annual Coupon / Price = $110 / $1,350 = 8.15%

(c) As Yield to maturity is less than Current Yield , So there is Loss Yield

Loss Yield = Current Yield - Yield to maturity

= 8.15% - 6.20%

= 1.95%

(d) Time to Call ( Nper ) = 5 Years

Annual Coupon ( Pmt ) = $1,000 * 11% = $110

Call Value ( CV ) = $1,150

Price of Bond ( PV ) = $1,350

Bond Yield to Call ( YTC ) = ??

(e) We will earn more in YTM

If there is any doubt please ask in comments

Thamk you please rate

Rahul Sunny answered 2 years ago

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