It is now January 1, 2009, and you are considering the purchase of an outstandin
ID: 2663692 • Letter: I
Question
It is now January 1, 2009, and you are considering the purchase of an outstanding bond that was issued on January 1, 2007. It has a 9% annual coupon and had a 20-year original maturity. (It matures on December 31, 2026.) There was 5 years of call protection (until December 31, 2011), after which time it can be called at 109 (that is, at 109% of par, or $1,090). Interest rates have declined since it was issued, and it is now selling at 114.12% of par, or $1,141.2.a. What is the yield to maturity? Round your answer to two decimal places.
b. What is the yield to call? Round your answer to two decimal places.
c. If you bought this bond, which return do you think you would actually earn? Explain your reasoning.
-Select-IIIIIIIVVItem 3
I. Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM.
II. Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC.
III. Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC.
IV. Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.
V. Investors would expect the bonds to be called and to earn the YTC because the YTM is less than the YTC.
d. Suppose the bond had been selling at a discount rather than a premium. Would the yield to maturity then have been the most likely actual return, or would the yield to call have been most likely?
-Select-IIIIIIIVVItem 4
I. Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC.
II. Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC.
III. Investors would expect the bonds to be called and to earn the YTC because the YTM is less than the YTC.
IV. Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM.
V. Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM
Explanation / Answer
Face Value 1000 Coupon 85 Price 1115.45 YTM 7.22% Maturity 15 Call Maturity 5 Yield to call 7.23% call price 109 Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM. If the bond is a discount bond i.e trading at a value less than face value then the company will not call the bond as it will not pay higher valuehan the market value. Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC.
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