Question

Problem 7-11 Bond yields One year ago Carson Industries issued a 10-year, 15% semiannual coupon bond at its par value of $1,000. Currently, the bond can be called in 6 years at a price of $1,075, and it now sells for $1,180. What is the bond's nominal yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places. % What is the bond's nominal yield to call? Do not round intermediate calculations. Round your answer to two decimal places. % Would an investor be more likely to earn the YTM or the YTC? -Select-Since the YTM is above the YTC, the bond is not likely to be called.Since the YTC is above the YTM, the bond is not likely to be called.Since the coupon rate on the bond has declined, the bond is not likely to be called.Since the YTM is above the YTC, the bond is likely to be called.Since the YTC is above the YTM, the bond is likely to be called.Item 3 What is the current yield? (Hint: Refer to Footnote 7 for the definition of the current yield and to Table 7.1.) Round your answer to two decimal places. % Is this yield affected by whether the bond is likely to be called? If the bond is called, the current yield and the capital gains yield will remain the same but the coupon rate will be different. If the bond is called, the current yield will remain the same but the capital gains yield will be different. If the bond is called, the current yield and the capital gains yield will remain the same. If the bond is called, the capital gains yield will remain the same but the current yield will be different. If the bond is called, the current yield and the capital gains yield will both be different. -Select-IIIIIIIVVItem 5 What is the expected capital gains (or loss) yield for the coming year? Use amounts calculated in above requirements for calcuation, if reqired. Round your answer to two decimal places. Enter a loss percentage, if any, with a minus sign. % Is this yield dependent on whether the bond is expected to be called? If the bond is not expected to be called, the appropriate expected total return is the YTC. If the bond is expected to be called, the appropriate expected total return will not change. The expected capital gains (or loss) yield for the coming year depends on whether or not the bond is expected to be called. The expected capital gains (or loss) yield for the coming year does not depend on whether or not the bond is expected to be called. If the bond is expected to be called, the appropriate expected total return is the YTM. -Select-IIIIIIIVVItem 7

Answer 1

Solution:

Calculation of the Bond's Nominal Yield to Maturity:

YTM = rate(nper,pmt,pv,fv) * 2

Nper (indicates the period) = (10-1)*2 = 18

PV (indicates the price) = $1,180

PMT (indicate the semi annual payment) = $1,000*15%*1/2 = $75

FV (indicates the face value) = $1000

Rate (indicates YTM) = ?

YTM = rate(18,75, -$1,180, $1,000) * 2

YTM = 11.71%

Therefore, the Yield to Maturity is 11.71%

Calculation of the Bond's Nominal Yield to Call:

YTC = rate(nper,pmt,pv,fv) * 2

Nper (indicates the period) = (6-1)*2 = 10

PV (indicates the price) = $1,180

PMT (indicate the semi annual payment) = $1,000*15%*1/2 = $75

FV (indicates the call value) = $1,075

Rate (indicates YTC) = ?

YTC = rate(10,75,-1180, 1075)*2

YTC = 11.34%

Therefore, the Bond's Nominal Yield to Call is 11.34%.

Would an investor be more likely to earn the YTM or the YTC?

Since the YTM is above the YTC, the bond is not likely to be called.

Calculation of the Current Yield:

Current yield = Semi annual payment/Current price * 2

Current yield = 75/1180 * 2

Current yield = 12.71%

Therefore, the Current Yield is 12.71%.

Is this yield affected by whether the bond is likely to be called:

If the bond is called, the current yield will remain the same but the capital gains yield will be different.

Calculation of the Expected Capital Gains (or Loss) yield for the coming year:

Expected capital gains (or loss) yield = YTM - Current yield

Expected capital gains (or loss) yield = 11.71% - 12.71%

Expected capital gains (or loss) yield = -1%

Is this yield dependent on whether the bond is expected to be called:

The expected capital gains (or loss) yield for the coming year depends on whether or not the bond is expected to be called.