A n 10.0%, 25-year bond has a par value of $1,000 and a ca pnce of $1,075 The bo

Question

A n 10.0%, 25-year bond has a par value of $1,000 and a ca pnce of $1,075 The bond's first call date s in 5 years. Coupon payments are made sem annualy so use se iannual compounding where appropriate a. Find the current yield, YTM, and YTC on this issue, given that it is currently being priced in the market at $1,200. Which of these 3 yields is the highest? Which is the lowest? Which yield would you use to value this bond? Explain. b. Repeat the 3 calculations above, given that the bond is being priced at $850. Now which yield is the highest? Which is the lowest? Which yield would you use to value this bond? Explain. a. If the bond is priced at $1,200, the current yeld is %. (Round to two dec mal places.) The annual yield-to-maturity with semiannual compounding is The annual yield-to-call with semiannual compounding is. (Round to two decimal places.) Which of these 3 yields is the highest? Which is the lowest? (Select from the drop-down menus.) % ( Round to two decimal places.) Vis the highest, while is the lowest Which yield would you use to value this bond? (Select the best answer below.) 0 A. The yield-to-maturity is always used. O B. The yield-to-maturity because the bonds may not be called. O C. The yield-to-call because convention is to use the lower more conservative measure of yield. O D. It doesn't matter which yield you use. b. If the bond s priced at $850, the current yield is %. (Round to two decimal places.) The annual yield-to-maturity with semiannual compounding is % Round to two decimal places.) The annual yield-to-call with semiannual compounding is%. (Round to two decimal places.) Which of these 3 y elds is the highest? Which is the lowest? (Select from the drop-down menus.) is the highest, while is the lowest. Which yield would you use to value this bond? (Select the best answer below.) O A. O B. ? ?. O D. It doesn't matter which yield you use. The yield-to-maturity is always used. The yield-to-maturity because convention is to use the lower of yield-to-maturity or yield-to-call for bonds selling at a discount. The yield-to-maturity because the bonds may not be called.

Explanation / Answer

a)

1)

Current yield = Annual interest payment / current bond price

Annual interest payment = 0.1 * 1000 = 100

Current yield = 100 / 1200

Current yield = 0.0833 or 8.33%

2)

Coupon payment = 0.1 * 1000 = 100 / 2 = 50 ( since it is a semi annual bond, we divide by 2)

Number of period = 25 * 2 = 50

Yield to maturity using a financial calculator = 8.19%

keys to use in a financial calculator: 2nd I/Y 2, PV = -1200, FV = 1000, PMT = 50, N = 50, CPT I/Y

3)

Yield to call using a financial calculator = 6.54%

Keys to use in a financial calculator:2nd I/Y 2, FV = 1075, PV = -1200, N = 10, PMT = 50, CPT I/Y

4)

Current yield is greates and yield to call is lowest

5)

The yield to maturity is always used.

2)

a)

Current yield = 100 / 850

Current yield = 11.76%

b)

Yield to maturity using a financial calculator = 11.89%

Keys to use in a financial calculator: 2nd I/Y 2, PV = -850, FV = 1000, PMT = 50, N = 50, CPT I/Y

c)

The annual yield to call using a financial calculator = 15.47

Keys to use in a financial calculator: PV = -850, FV = 1075, N = 10, PMT = 50, CPT I/Y

d)

Yield to call is highest and current yield is lowest.

e)

The yield to maturity is always used

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