Question

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 $1,142, and currently sell at a price of $1,261.56.

1. What is their nominal yield to maturity? Round your answer to two decimal places.
   
   %
   
2. What is their nominal yield to call? 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 greater than the YTM.
   2. Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC.
   3. Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC.
   4. Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.
   5. Investors would expect the bonds to be called and to earn the YTC because the YTM is less than the YTC.
   
   -Select-IIIIIIIVV

Answer 1

1
Face value (FV)	1000
Coupon rate	11.00%
Number of compounding periods per year	2
Interest per period (PMT) (1000*11%/2)	55
Bond price (PV)	1261.56
Number of years to maturity	8
Number of compounding periods till maturity (NPER)	16
Bond yield to maturity	RATE(NPER,PMT,PV,FV)*2
Bond yield to maturity	6.72%
2
Call price (Here it is FV)	1142
Coupon rate	11.00%
Number of compounding periods per year	2
Interest per period (PMT)	55
Bond price (PV)	-1261.56
Number of years to call (NPER)	4
Bond Yield to call	RATE(NPER,PMT,PV,FV)*2
Bond Yield to call	6.61%
3
IV. Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.