Question

Use the following information to answer question 1) A-F. Assume today is 12/27/2016. An assistant portfolio manager reviewed the prospectus of a General Electric Corporate (US) bond that will be issued on January 15 of 2017. The Offering Price is 104.50. The call schedule for this $200 million, 5.75% coupon 20-year issue specifies the following:

The Bonds will be redeemable at the option of the Company at any time in whole or in part, upon not fewer than 30 nor more than 60 days’ notice, at the following redemption prices (which are expressed in percentages of principal amount) in each case together with accrued interest to the date fixed for redemption:

If redeemed January 15,

2020 through 2026	102.50%
2027 through 2030	102.00%
2031 through 2032	101.50%
From 2033 on	100.00%

Sinking Fund: The prospectus further specifies that:

The Company will provide for the retirement by redemption of $40 million of the principal amount of the Bonds each January 15th of the years 2032 to and including 2036 at the principal amount thereof (100%), together with accrued interest to the date of redemption.

The assistant portfolio manager made the following statement to a client after reviewing this bond issue. Comment on the statement. (When answering this question, remember that the assistant portfolio manager is responding to statements just before the bond is issued in 2017.)

Answer the following as of issue date: 1/15/2017.

2. What is the bond’s current yield?
3. What is the bond’s yield to maturity?
4. What is bond’s yield to first call?
5. What is bond’s yield to first sink?
6. What is yield to the 2031 call?

Answer 1

B. The present value of all coupons equals to offering price of $104.5/

using Excel, goal seek we see that yield to maturity is 7.186%

current yield = 5.75/104.5 =5.50% p.a

c. Yield to Maturity = 7.186% p.a.

d, yield To first call is solved just like yield to maturity

	Coupon	PV
1	5.5	5.255419786
2	5.5	5.021715841
3	108.000	94.22321579

we get YTC = 4.6539% p.a.

e.

Year	coupon	PV	left	104.5
1	5.75	5.364528	99.13548	0.055024	1.055024
2	5.75	5.004897	94.13058	0.058001	1.058001
3	5.75	4.669375	89.46121	0.061085	1.061085
4	5.75	4.356347	85.10486	0.064274	1.064274
5	5.75	4.064303	81.04056	0.067564	1.067564
6	5.75	3.791838	77.24872	0.070952	1.070952
7	5.75	3.537638	73.71108	0.074435	1.074435
8	5.75	3.300479	70.4106	0.078007	1.078007
9	5.75	3.07922	67.33138	0.081664	1.081664
10	5.75	2.872793	64.45859	0.085399	1.085399
11	5.75	2.680205	61.77839	0.089205	1.089205
12	5.75	2.500527	59.27786	0.093075	1.093075
13	5.75	2.332895	56.94496	0.097001	1.097001
14	5.75	2.176501	54.76846	0.100975	1.100975
15	5.75	2.030591	52.73787	0.104987	1.104987

Yield to first sink = geometric means of yields = 7.8665% P.a.

f. Yield to 2031 call

Just like Yield to first call we find Yield to 2031 Call

which comes out to be 5.12% p.a.