In: Finance
A firm's bonds have a maturity of 12 years with a $1,000 face value, have an 11% semiannual coupon, are callable in 6 years at $1,203.17, and currently sell at a price of $1,355.58. What are their nominal yield to maturity and their nominal yield to call? Do not round intermediate calculations. Round your answers to two decimal places.
YTM: %
YTC: %
What return should investors expect to earn on these bonds?
-Select-IIIIIIIV
Answer to Part 1.
Face Value = $1,000
Current Price = $1,355.58
Annual Coupon Rate = 11%
Semiannual Coupon Rate = 5.50%
Semiannual Coupon = 5.50% * $1,000 = $55
Time to Maturity = 12 years
Semiannual Period to Maturity = 24
Let semiannual YTM be i%
$1,355.58 = $55 * PVIFA(i%, 24) + $1,000 * PVIF(i%, 24)
Using financial calculator:
N = 24
PV = -1355.58
PMT = 55
FV = 1000
I = 3.33%
Semiannual YTM = 3.33%
Annual YTM = 2 * 3.33%
Annual YTM = 6.66%
Answer to Part 2.
Face Value = $1,000
Current Price = $1,355.58
Call Price = $1,203.17
Annual Coupon Rate = 11%
Semiannual Coupon Rate = 5.50%
Semiannual Coupon = 5.50% * $1,000 = $55
Time to Call = 6 years
Semiannual Period to Call = 12
Let semiannual YTC be i%
$1,355.58 = $55 * PVIFA(i%, 12) + $1,203.17 * PVIF(i%, 12)
Using financial calculator:
N = 12
PV = -1355.58
PMT = 55
FV = 1203.17
I = 3.28%
Semiannual YTC = 3.28%
Annual YTC = 2 * 3.28%
Annual YTC = 6.56%
Answer to Part 3.
Investor would expect the bonds to be call and to earn the YTC
because the YTC is less than the YTM.