Question

ond yields

One year ago Carson Industries issued a 10-year, 13% semiannual coupon bond at its par value of $1,000. Currently, the bond can be called in 6 years at a price of $1,065, and it now sells for $1,270.

1. What is the bond's nominal yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places.
   %
   
   What is the bond's nominal yield to call? Do not round intermediate calculations. Round your answer to two decimal places.
   %
   
   Would an investor be more likely to earn the YTM or the YTC?
   -Select-Since the coupon rate on the bond has declined, the bond is not likely to be called.Since the YTM is above the YTC, the bond is likely to be called.Since the YTC is above the YTM, the bond is likely to be called.Since the YTM is above the YTC, the bond is not likely to be called.Since the YTC is above the YTM, the bond is not likely to be called.Item 3
   
2. What is the current yield? (Hint: Refer to Footnote 7 for the definition of the current yield and to Table 7.1.) Round your answer to two decimal places.
   %
   
   Is this yield affected by whether the bond is likely to be called?
   1. If the bond is called, the current yield and the capital gains yield will remain the same.
   2. If the bond is called, the capital gains yield will remain the same but the current yield will be different.
   3. If the bond is called, the current yield and the capital gains yield will both be different.
   4. If the bond is called, the current yield and the capital gains yield will remain the same but the coupon rate will be different.
   5. If the bond is called, the current yield will remain the same but the capital gains yield will be different.
   
   -Select-IIIIIIIVVItem 5
   
3. What is the expected capital gains (or loss) yield for the coming year? Use amounts calculated in above requirements for calcuation, if reqired. Round your answer to two decimal places. Enter a loss percentage, if any, with a minus sign.
   %
   
   Is this yield dependent on whether the bond is expected to be called?
   1. If the bond is expected to be called, the appropriate expected total return is the YTM.
   2. If the bond is not expected to be called, the appropriate expected total return is the YTC.
   3. If the bond is expected to be called, the appropriate expected total return will not change.
   4. The expected capital gains (or loss) yield for the coming year depends on whether or not the bond is expected to be called.
   5. The expected capital gains (or loss) yield for the coming year does not depend on whether or not the bond is expected to be called.

Answer 1

One year ago Carson Industries issued a 10-year, 13% semiannual coupon bond at its par value of $1,000. Currently, the bond can be called in 6 years at a price of $1,065, and it now sells for $1,270.

What is the bond's nominal yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places.

YTM can be found using the RATE function of excel.

Payment frequency = Semi annual

Inputs for RATE function will be:

Period = nos. of half year in time to maturity = 2 x 9 = 18

PMT = payment per period = Semi annual coupon = 13% / 2 x 1,000 = 65

PV = - Current price of the bond = -1270

FV = Future Value = Par value = 1000

Hence, YTM per period = Semi annual yield = RATE (Period, PMT, PV, FV) = RATE (18, 65, -1270, 1000) = 4.31%

Hence, annual YTM = 2 x semi annual yield = 2 x 4.31% = 8.63%

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What is the bond's nominal yield to call? Do not round intermediate calculations. Round your answer to two decimal places.

YTC can be found using the RATE function of excel.

Payment frequency = Semi annual

Inputs for RATE function will be:

Period = nos. of half year in time to call = 2 x 6 = 12

PMT = payment per period = Semi annual coupon = 13% / 2 x 1,000 = 65

PV = - Current price of the bond = -1270

FV = Future Value = Price on call = 1065

Hence, YTM per period = Semi annual yield = RATE (Period, PMT, PV, FV) = RATE (12, 65, -1270, 1065) = 4.05%

Hence, annual YTM = 2 x semi annual yield = 2 x 4.05% = 8.09%

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Would an investor be more likely to earn the YTM or the YTC?

Since YTC < YTM, the issuer will benefit by calling the bond. Hence the correct answer is

Since the YTM is above the YTC, the bond is likely to be called. - This is the correct answer. The issuer should call the bond

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Item 3
What is the current yield? (Hint: Refer to Footnote 7 for the definition of the current yield and to Table 7.1.) Round your answer to two decimal places.

Current yield = Annual coupon / Current price = 13% x 1000 / 1270 = 10.24%

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Is this yield affected by whether the bond is likely to be called?

The current yield is not affected, the capital gains yield is affected by the exercise of call option. Hence the correct answer is:

If the bond is called, the current yield will remain the same but the capital gains yield will be different.

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What is the expected capital gains (or loss) yield for the coming year? Use amounts calculated in above requirements for calculation, if required. Round your answer to two decimal places. Enter a loss percentage, if any, with a minus sign.

It depends, whether or not the bond is called.

If the bond is called, Capital Gains Yield = YTC - Current yield = 8.09% - 10.24% = -2.14%

If the bond is not called, Capital Gains Yield = YTM - Current yield = 8.63% - 10.24% = -1.61%

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Is this yield dependent on whether the bond is expected to be called?

The correct answer is:

The expected capital gains (or loss) yield for the coming year depends on whether or not the bond is expected to be called.