PLEASE SHOW WORK On May 11, 2000 you purchased a subordinated debenture of Sigg,

Question

PLEASE SHOW WORK

On May 11, 2000 you purchased a subordinated debenture of Sigg, Inc that had an annual yield to maturity of 12%, compounded semi-annually. The bond has an annual coupon rate of 8% payable semi-annually and is scheduled to mature on May 11, 2021. Suppose 10 years have gone by....

(a) the yield to maturity on 21 year bonds has declined to 10%, compounded semi-annually and to 9.5%, compounded semi-annually on 11 year bonds. You decide to sell the bond at the going market price. Compute your annual rate of return over the 10 years that you held the bond.

(b) Suppose the bond is callable at $1095. Compute your annual rate of return if Sigg calls the bond.

Explanation / Answer

a) The original issue price was $695.51per $1,000 face amount.
.... Price after 10 years at YTM of 9.5%: $898.99 (it is now an 11 year bond to maturity)
.... Yield over 10 years held: 15.58%

(b) Yield over 10 years if called at $1,095: 18.9%

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