Question

1. Meacham Enterprises' bonds currently sell for $1,280 and have a par value of $1,000. They pay a $135 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,050. What is their yield to call (YTC)?

2. Currently, Bruner Inc.'s bonds sell for $1,250. They pay a $120 annual coupon, have a 15-year maturity, and a $1,000 par value, but they can be called in 5 years at $1,050. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. What is the difference between this bond's YTM and its YTC? (Subtract the YTC from the YTM.)

Answer 1

1.

Data:	Current Price (PV)		$ 1,280.00
	Par Value		1,000.00
	Interest Payment		135
	Time to Maturity		15	Years
	Callable		5	Years
	Callable Price (FV)		1,050.00
	Yield to Call		?
	Formula Used:		RATE(NPER, PMT, -PV, FV)
		=	RATE(5, 135, -1280, 1050)
		=	7.45%

 

2.

Data:	Current Price (PV)		$ 1,250.00
	PMT		120
	Time to Maturity		15	Years
	Future Value		1,000.00
	Yield to Maturity		?
	Formula Used:		RATE(NPER, PMT, -PV, FV)
		=	RATE(15, 120, -1250, 1000)
		=	8.91%
Data:	Current Price (PV)		$ 1,250.00
	PMT		120
	Time to Maturity		5	Years
	Future Value		1,050.00
	Yield to Call		?
	Formula Used:		RATE(NPER, PMT, -PV, FV)
		=	RATE(5, 120, -1250, 1050)
		=	6.81%
	Difference	2.11%

2.11%