Question

YIELD TO MATURITY

A firm's bonds have a maturity of 8 years with a $1,000 face value, have an 11% semiannual coupon, are callable in 4 years at $1,152, and currently sell at a price of $1,278.74.

1. What is their nominal yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places.
   
   %
   
2. What is their nominal yield to call? Do not round intermediate calculations. Round your answer to two decimal places.
   
   %
   
3. What return should investors expect to earn on these bonds?
   
   1. Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.
   2. Investors would expect the bonds to be called and to earn the YTC because the YTM is less than the YTC.
   3. Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM.
   4. Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC.
   5. Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC.
   
   -Select-IIIIIIIVVItem 3

Answer 1

a.

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =8x2

1278.74 =∑ [(11*1000/200)/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^8x2

k=1

YTM% = 6.48

b.

K = Time to callx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTC/2)^k]     +   Call Price/(1 + YTC/2)^Time to callx2

k=1

K =8x2

1278.74 =∑ [(11*1152/200)/(1 + YTC/200)^k]     +   1152/(1 + YTC/200)^8x2

k=1

YTC% = 9.04

c

Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM.

Bond will be called because current market rate ytm is much lower than coupon rate and company can call back the bond and reissue new bonds at lower rate of the market