Question

calculate using a financial calculator

Last year Clark Company issued a 10-year, 12% semiannual coupon bond at its par value of $1,000. Currently, the bond can be called in 4 years at a price of $1,060 and it sells for $1,100.

What are the bond’s nominal yield to maturity and its nominal yield to call? Would an investor be more likely to earn the YTM or the YTC?

What is the current yield? Is this yield affected by whether the bond is likely to be called? (Hint: Refer to Footnote 8 for the definition of the current yield and to Table 7-1.)

What is the expected capital gains (or loss) yield for the coming year? Is this yield dependent on whether the bond is expected to be called?

Answer 1

Here,

Face value of bond= 1000 dollars .

Coupon rate= 12%.

Maturity period = 10 years.

coupon payment semi-annualy.

Now,

Yield to maturity = bond yield +coupon yield= 10.370 % (Using financial calculator

Yield to call = 10.150% (Using financial calculator).

Here, from yield to maturity, investor likely to earn more.

Current yield is annual return based on annual coupon and current price of bond.

Current yield = bond's annual coupon divided by it's current price .

No, it can't be affected because we calculate current yield based on current price and coupon payment instead callable price.

Capital gain is returned from on buying price of bond and maturity value of bond.

Here, buying price of bond is higher than face value of bond. Hence, can be expected capital loss yield.

Loss yield =( bond buying price - face value of bond / bond buying price.) *100

= - 9.09%

Yes, capital gain yield is dependent on callable price and bond is expected to call.

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