In: Finance
Company currently has a nine yrs bond that is callable in four yrs from today with a call premium of 1%. This bond annual coupon rate is 10% paid semi-annually and it is currently selling at $1,120 per share. What is the bond annual yield to call and the bond annual yield to maturity? Also, if general interest rate is expected to remains unchanged, based on comparison between yield to call and yield to maturity that you have calculated, do you think is best for this company to call this bond today and why or why not?
please help with excel step-by-step (detailed) much appreciated**
1- | nper = n | call period 4 year and interest is compounded semiannually =4*2 =8 | ||
PMT = semi annual Interest payment | face value*Interest rate*1/2 | 1000*10%*1/2 =50 | ||
PV= current market price | 1120 | |||
Future value = callable value | face value+(future value*1%) | 1000+(1000*1%) =1010 | ||
Yield to call-semiannual =Using rate function in MS excel | rate(nper,pmt,pv,fv,type) nper=4*2 =8 pmt =1000*10%*1/2 =50 pv =1120 fv=1000*1.01 =1010 type =0 | RATE(8,-50,1120,-1010,0) | 3.37% | |
Yield to call-annual | semi annual yield to call*2 | 3.37*2 | 6.74 | |
2- | nper = n | Maturity period 9 year and interest is compounded semiannually =9*2 =18 | ||
PMT = semi annual Interest payment | face value*Interest rate*1/2 | 1000*10%*1/2 =50 | ||
PV= current market price | 1120 | |||
Future value =face value | 1000 | |||
Yield to maturity-semiannual =Using rate function in MS excel | rate(nper,pmt,pv,fv,type) nper=9*2 =18 pmt =1000*10%*1/2 =50 pv =1120 fv=1000 type =0 | RATE(18,-50,1120,-1000,0) | 4.05% | |
Yield to call-annual | semi annual yield to call*2 | 4.05*2 | 8.1 | |
3- | This is the best time to call the bonds as Yield to call is 6.74% which is less than the market rate of interest (YTM) 8.1% so company should call the bonds as it will cost 6.74% to the company. |