One year ago Clark Company issued a 10-year, 13% semiannual coupon bond at its p
ID: 2613441 • Letter: O
Question
One year ago Clark Company 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.
A) What is the bond's nominal yield to maturity? Round your answer to two decimal places.
What is the bond's nominal yield to call? Round your answer to two decimal places.
Would an investor be more likely to earn the YTM or the YTC?
B) 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?
C) What is the expected capital gains (or loss) yield for the coming year? Round your answer to two decimal places.
Is this yield dependent on whether the bond is expected to be called?
Explanation / Answer
Solution:
Yield to Maturity = {Annual Coupon + [(Par Value - Market Value) / Years to Maturity]} / [(Par Value + Market Value) / 2]
Yield to Maturity
= {130 + [(1,000 - 1,270) / 10]} / [(1,000 + 1,270) / 2]
= 103 / 1135 = 0.0907
Yield to Maturity = 9.07%
Yield to Call = {Annual Coupon + [(Call Value - Market Value) / Years to Call]} / [(Call Value + Market Value) / 2]
Yield to Call
= {130 + [(1,065 - 1,270) / 6]} / [(1,065 + 1,270) / 2]
= 95.83 / 1167.50 = 0.0821
Yield to Call = 8.21%
The bond is being sold at a high premium clearly depicting that the market rate of interest is much lower than what is being paid for the bond. Thus, the company will call the bonds and reissue newer bonds at a lower rate, thus, saving on interest expenses incurred. Hence, it is more likely that investors will earn YTC over YTM.
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