McCue Inc.’s bonds currently sell for $1,070. They pay a $120 annual coupon, have a 11-year...

McCue Inc.’s bonds currently sell for $1,070. They pay a $120 annual coupon, have a 11-year maturity and a $1,000 par value, but they can be called in 4 years at $1,080. 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 into the future. What is the difference between this bond’s YTM and its YTC? (Subtract the YTC from the YTM.)

Expert Solution

YTM is calculated using RATE function in Excel :

nper = 11 (years remaining until maturity with 1 annual coupon payment each year)

pmt = 120 (annual coupon payment\)

pv = -1070 (Current price of bond. This is entered with a negative sign because it is a cash outflow to buy the bond today).

fv = 1000 (face value of bond receivable at maturity).

RATE is calculated to be 10.88%. This is the YTM.

YTC is calculated using RATE function in Excel with these inputs :

nper = 4 (4 years to call date with 1 annual coupon payment each year)

pmt = 120 (annual coupon payment\)

pv = -1070 (Current price of bond. This is entered with a negative sign because it is a cash outflow to buy the bond today).

fv = 1080 (call price of the bond receivable on call date. This is a positive figure as it is an inflow to the bondholder)

The RATE is calculated to be 11.41%. This is the YTC.

jeff jeffy answered 1 year ago

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