A bond with a face value of $1,000 matures in 12 years and has a 9...

A bond with a face value of $1,000 matures in 12 years and has a 9 percent semiannual coupon. The bond has a nominal yield to maturity of 6.85%, and it can be called in 4 years at a call price of $1,045. Assume equilibrium, which of the following statement is correct? (hint: what kind of bond is this?)

Select one:

a. The bond is currently traded at a discount.

b. The expected current yield will decrease.

c. All else equal, the price of the bond is expected to increase over time.

d. The bond is less likely to be called.

e. Bondholders are most likely to earn the YTC.

Solutions

Expert Solution

Since the YTM is lower than coupon rate, the bond is currently at premium.

Yield to Call (YTC) is assessed at 5.157676%. Since YTC is lower than YTM, the issuer is likely to exercise the call option. Hence the Bondholders are most likely to earn the YTC.

The answer is option e.

Calculation of YTC as below:

jeff jeffy answered 1 year ago

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