BOND VIELDS Last year Carson Industries issued a 10-year, 12% semannual coupon b
ID: 2616735 • Letter: B
Question
BOND VIELDS Last year Carson Industries issued a 10-year, 12% semannual coupon bond at its par value of $1,000. Currently, the bond can be ca sells for $1,300 O a. What is the bond's nominal yield to maturity? Do not round int 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? 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? L. If the bond is called, the current yield and the capital gains yield I1. If the bond is called, the current yield wil remain the same but the capital gains yield wil be III. If the bond is called, the current yield and the capital gains yield will remain the same will remain the same but the coupon rate will be different. different If the bond is called, the capital gains yield will remain the same but the current yield will be different. . If the bond is called, the current yieid and the capital gains yieid will both be 2 5 UlExplanation / Answer
I am going to answer the first 5 parts to the question:
a) To calculate YTM put the following inputs in your financial calculator:
PV=-1300
FV= 1000
PMT= 0.12*1000/2= 60
N= 9*2 =18
CPT I/Y= 3.69% *2 = 7.38%
b) To calculate YTC put the following inputs in your financial calculator:
PV= -1300
FV= 1060 (Call Price)
PMT =60
N= 6*2=12
CPT I/Y= 3.34*2= 6.68%
c) The investor is more like to earn the YTC as the bond is trading at premium to current price and hence will be called.
d) Current Yield = Coupon Payments/ Market Price of Bond = 60/1300=4.6154*2= 9.2308%
e) The correct answer is II. The current yield will remain the same but capital gains yield will be different. Note total yield of a bond can be denoted as :
Total Yield = Current Yield + Capital Gain Yield
If the bond is not called total yield will be 7.38 % vs 6.68% if the bond is called. Current Yield will stay same at 9.2308%. Hence, capital gain yield will have to change to adjust to total yield.
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