One year ago Clark Company issued a 30-year, 14% semiannual coupon bond at its p
ID: 2663740 • Letter: O
Question
One year ago Clark Company issued a 30-year, 14% semiannual coupon bond at its par value of $1,000. The bond can be called in 6 years at a price of $1,100, and it now sells for $1,200.a. What are the bond's nominal yield to maturity? Round your answer to two decimal places.
b. What are the bond's nominal yield to call? Round your answer to two decimal places.
c. Would an investor be more likely to actually earn the YTM or the YTC?
-Select-Since the YTM is above the YTC, the bond is likely to be called.Since the YTC is above the YTM, the bond is likely to be called.Since the YTM is above the YTC, the bond is not likely to be called.Since the YTC is above the YTM, the bond is not likely to be called.Since the coupon rate on the bond has declined, the bond is not likely to be called.Item 3
d. What is the current yield? Round your answer to two decimal places.
e. Is this yield affected by whether or not the bond is likely to be called?
-Select-IIIIIIIVVItem 5
I. If the bond is called, the current yield and the capital gains yield will remain the same but the coupon rate will be different.
II. If the bond is called, the current yield will remain the same but the capital gains yield will be different.
III. If the bond is called, the current yield and the capital gains yield will remain the same.
IV. If the bond is called, the capital gains yield will remain the same but the current yield will be different.
V. If the bond is called, the current yield and the capital gains yield will both be different.
f. What is the expected capital gains (or loss) yield for the coming year? Round your answer to two decimal places.
g. Is this yield dependent on whether or not the bond is expected to be called?
-Select-IIIIIIIVVItem 7
I. If the bond is not expected to be called, the appropriate expected total return is the YTC.
II. If the bond is expected to be called, the appropriate expected total return will not change.
III. The expected capital gains (or loss) yield for the coming year depends on whether or not the bond is expected to be called.
IV. The expected capital gains (or loss) yield for the coming year does not depend on whether or not the bond is expected to be called.
V. If the bond is expected to be called, the appropriate expected total return is the YTM.
Explanation / Answer
a) culating the YTM of the bond using excel sheet: Step1: Go to excel and click "insert" to insert the function. Step2: Select the "Rate" function as we are finding the yield of the bond in this case. Step3: Enter the values as Nper = 30*2; PMT = -70; PV = 1200; FV = -1000 Step4: Click "OK" to get the desired value. The value comes to "5.80%" The coupon payment is calculated as Coupon payment = Face value of the bond * Coupon rate = $1,000 * (14% / 2) = $70 The nominal yield to maturity is 5.80% for semi-annual period The nominal YTM for annual period is 11.6% Calculating the nominal yield to call using excel sheet: Step1: Go to excel and click "insert" to insert the function. Step2: Select the "Rate" function as we are finding the yield of the bond in this case. Step3: Enter the values as Nper = 6*2; PMT = -70; PV = 1100; FV = -1000 Step4: Click "OK" to get the desired value. The value comes to "5.82%" Therefore, the nominal yield to call is 5.82% c) SInce the bond's YTC is above the bonds YTM, the bond is not likely to be called. d) The formula for calculating the current yield is Annual coupon payment / Current price of the bond $140 / $1,200 = 0.1167 or 11.67% e) If the bond is called the capital yield will be the same but the current yield will be different. f) The capital gain or loss is calculated using the formula as: Par value of the bond - Current price of the bond The bond's price in the year-1 is calculated as: Step1: Go to excel and click "insert" to insert the function. Step2: Select the "PV" function as we are finding the present value of the bond in this case. Step3: Enter the values as Rate = 11.6%; Nper = 1; PMT = -140; FV = -1000 Step4: Click "OK" to get the desired value. The value comes to "$1,021" Therefore, the price of the bond in the first year is $1,021 Capital gains = $1,000 - $1,021 =$21 f) The bonds expected capital gains or loss does not depend on whether or not the bond is expected to be called.
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