Thatcher Corporation\'s bonds will mature in 10 years. The bonds have a face val
ID: 2383866 • Letter: T
Question
Thatcher Corporation's bonds will mature in 10 years. The bonds have a face value of $1000 and an 8% coupon rate, paid semiannually. The price of the bonds is $1100. The bonds are callable in 5 years at a call price of $1050. What is their yield to maturity? What is their yield to call? Thatcher Corporation's bonds will mature in 10 years. The bonds have a face value of $1000 and an 8% coupon rate, paid semiannually. The price of the bonds is $1100. The bonds are callable in 5 years at a call price of $1050. What is their yield to maturity? What is their yield to call? Thatcher Corporation's bonds will mature in 10 years. The bonds have a face value of $1000 and an 8% coupon rate, paid semiannually. The price of the bonds is $1100. The bonds are callable in 5 years at a call price of $1050. What is their yield to maturity? What is their yield to call?Explanation / Answer
Ans
Ans 1 YTM Details Coupon Rate 8.00% Semi Annual Coupon Rate 4.00% Semi Annual Coupon Amount 40.00 Face Value 1000 Market Price 1100 Maturity Period in Years 10 Maturity Period in Semi-Annual Years 20 YTM is the rate of return that makes face value equal to Market price. While trying with a rate of 3%(6% PA) it gives a MV of C*((1-(1+r^-n))/r))+(FV*1+r^-n) 40*((1-(1.03^-20))/.03)+(1000*1.03^-20) 1148.7747 Since it is More than the MV , trying with 3.3%(6.6%) ,gives a MV of 40*((1-(1.033^-20))/.033)+(1000*1.033^-20) 1,101 Hence semi annual YTM is 3.30% Annual YTM 6.60% Ans 2 Yield to Call Note: Assumed that call will be excercised at the end of year 5 . The call price replaces the face value in the formula Details Coupon Rate 8.00% Semi Annual Coupon Rate 4.00% Semi Annual Coupon Amount 42.00 Call Price 1050 Market Price 1100 Expected Call date -at the end of 5th year 5 Maturity Period in Semi-Annual Years 10 YTC is the rate of return that makes Call Value equal to Market price. While trying with a rate of 3.8%(7.6% PA) it gives a MV of C*((1-(1+r^-n))/r))+(FV*1+r^-n) 40*((1-(1.038^-10))/.038)+(1050*1.038^-10) 1051 Since at the Semi annual rate of 3.8% MV of the bond equals Call price Hence YTC (3.8% *2) 7.60%Related Questions
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