A firm's bonds have a maturity of 12 years with a $1,000 face value, have an...

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 $1,206.61, and currently sell at a price of $1,363.46. What is their nominal yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places. What is their nominal yield to call? Do not round intermediate calculations. Round your answer to two decimal places.

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Expert Solution

Calculating Nominal Yield to maturity

Face Value = $1000, Coupon rate = 11%, Current price = $1363.46, Years to maturity = 12

Since the bond pays coupon semi annually, therefore

Semi annual coupon payment = (Coupon rate x par value) / 2 = (11% x 1000) / 2 = 110 / 2 = $55

No of half years to maturity = 2 x no of years to maturity = 2 x 12 = 24 half years

First we will find the semi annual yield to maturity of bond

We can find the semi annual yield to maturity by using RATE function in excel

Formula to be used in excel: =RATE(nper,-pmt,pv,-fv)

Using RATE function in excel, we get semi annual yield to maturity = 3.2869%

Nominal Yield to maturity = 2 x Semi annual yield to maturity = 2 x 3.2869% = 6.5738% = 6.57% (rounded to two decimal places)

Hence Nominal Yield to maturity = 6.57%

Calculating Nominal Yield to Call

Call price = $1206.61, Coupon rate = 11%, Current price = $1363.46, Years to call = 6

Since the bond pays coupon semi annually, therefore

Semi annual coupon payment = (Coupon rate x par value) / 2 = (11% x 1000) / 2 = 110 / 2 = $55

No of half years to call = 2 x no of years to call = 2 x 6 = 12 half years

First we will find the semi annual yield to call of bond

We can find the semi annual yield to call by using RATE function in excel

Formula to be used in excel: =RATE(nper,-pmt,pv,-fv)

Using RATE function in excel, we get semi annual yield to call = 3.233%

Nominal Yield to call = 2 x Semi annual yield to call = 2 x 3.233% = 6.466% = 6.47% (rounded to two decimal places)

Hence Nominal Yield to call = 6.47%

jeff jeffy answered 1 year ago

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