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The Miraculous Medicinals Company (MMC), a manufacturer and distributor of cannabis-based therapeutics, issued bonds with the...

The Miraculous Medicinals Company (MMC), a manufacturer and distributor of cannabis-based therapeutics, issued bonds with the following characteristics on January 1, 2020: $1,000 par value, annual nominal interest rate of 7.5%, semiannual coupon payments, and a maturity of 10 years. The bonds are callable at the end of 3 years with a call premium equal to one semiannual coupon payment.

On July 1^st of 2020 the price of one of these bonds had declined to $875 (Assume that the coupon payment due July 1^st has already been paid.)

Is this bond considered a “discount” or a “premium” bond? Have interest rates risen or fallen since the time the bond was issued? r

Calculate the Yield to Maturity (YTM) of this bond as of July 1, 2020.

Calculate the Yield to Call (YTC) of this bond as of July 1, 2020.

If the interest rate environment that exists in July of 2020 persists over the next several years, would you expect that MMC will call this bond? Why or why not?

Given the above, should investors expect to earn the YTM or the YTC?

Expert Solution

1)

Bond price < Bond par value. Bond is a discount bond.

2)

3)

4)

Bond will not be called. Interest rates raised.

5)

Investors would expect to receive YTM. YTM < YTC.

jeff jeffy answered 1 year ago

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