Question

Consider the following bond:
Coupon rate: 11% per annum
Maturity: 18 years
Par value: RM1,000
Bond Value: RM1169.00
Compounding: Semiannually
First par call in 13 years
Only put date in five years and putable at par value

Suppose that the market price for this bond RM1,169.

a) Estimate and interpret the current yield for the bond. (5 marks)
b) Calculate the yield to maturity for this bond. (5 marks)
c) Compute that the yield to first par call. (5 marks)
d) Find the yield to put. (5 marks)
e) Suppose that the call schedule for this bond is as follows:
Can be called in 8 years at RM1,055
Can be called in 13 years at RM1,000
And suppose this bond can only be put in five years and assume that the yield to first par call is 8.535%. Calculate yield to worst for this bond. (5 marks)

Answer 1

Solution

Solving first four sub-questions as per Chegg's guidelines:

a)Calculation of Current yield

Current yield=Annual coupon/Current market price

=(RM1,000*11%)/RM1169

=0.00941 or 9.41%

It shows the annual return that the investor will earn if hold the bond for a year.

b)Calculation of yield to maturity(YTM)

YTM=[Annual coupon+(Face value-Current price)/Years to maturity)]/(Face value+Current price)/2

=[$110+($1000-$1169)/18]/($1000+$1169)/2

=0.0928 or 9.28%

c)Calculation of yield to first call par call

Formula to calculate yield to first par call is;

=[Annual coupon+(Call value-current price)/years to call]/(Call value+Current price)/2

=[$110+($1000-1169)/13]/($1000+$1169)/2

=0.0894 or 8.94%

d)Calculation of yield to put

Yield to put is

=[Annual coupon+(Put value-current price)/years to put]/(Put value+Current price)/2

=[$110+($1000-$1169)/5]/($1000+$1169)/2

=0.0703 or 7.03%