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PT MAJU's corporate bonds can currently be sold for $ 1,150. These bonds have a nominal...

PT MAJU's corporate bonds can currently be sold for $ 1,150. These bonds have a nominal value of $ 1,000 with an annual coupon rate of 7% per year and a age of 10 years. However, the bond could be withdrawn from circulation after 6 years at a price of $ 1,067. In this case it is assumed that there are no transaction costs except for the call premium which is given at the time of withdrawal and refund of bonds and the yield curve is horizontal, with rates that remain constant at the current level to the future.

Question

With the conditions mentioned above, what is the rate of return that investors expect if they buy the bonds, whether they are kept to maturity (Yield To Maturity) or if they arrive at withdrawal before maturity (Yield To Call)?

Solutions

Expert Solution

Solution: for YTM there is direct formula

for YTC question is solved by taking 1st YTC at 5% and then YTC at 6% to get market price of 1150 which is present value (pv) of bond price. Hope this helps:)

ekkarill92 answered 1 year ago
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