YIELD TO MATURITY AND YIELD TO CALL Kaufman Enterprises has bonds outstanding wi
ID: 2668240 • Letter: Y
Question
YIELD TO MATURITY AND YIELD TO CALL Kaufman Enterprises has bonds outstandingwith a $1,000 face value and 10 years left until maturity. They have an 11% annual coupon
payment, and their current price is $1,175. The bonds may be called in 5 years at 109% of
face value (Call price ¼ $1,090).
d. The bond ’ s indenture indicates that the call provision gives the firm the right to callthe bonds at the end of each year beginning in Year 5. In Year 5, the bonds may be called at 109% of face value; but in each of the next 4 years, the call percentage will decline by 1%. Thus, in Year 6, they may be called at 108% of face value; in Year 7, they may be called at 107% of face value; and so forth. If the yield curve is horizontal and interest rates remain at their current level, when is the latest that investors might expect the firm to call the bonds?
Explanation / Answer
10 years
Par Value of theBond $1,000 Number of Years toMaturity10 years
Annual Coupon Rate 11% Current Price of theBond $1,175 Call Price of the Bond $1,090 CalculatingYTM: (Using Ms-Excel "RATE"Function): Number of Periods 10 Annual Coupon Payment [$1,000 *11%] -$110 Present Value of theBond $1,175 Future Value (or) Par Value of theBond -$1,000 Rate of Return on the Bond(RATE) 8.35% Calculating YTC (Yield ToCall) (Using Ms-Excel "RATE"Function): Number of Periods 5 Annual Coupon Payment [$1,000 *11%] -$110 Present Value of theBond $1,175 Future Value (or) Par Value of theBond -$1,090 Rate of Return on the Bond(RATE) 8.13% Yield to Maturity on theBond (YTM) 8.35% Yield to Call on theBond (YTC) 8.13% if the Bond is a PremiumBond YTM > YTC if the Bond is a DiscountBond YTM < YTC Note: Here, the Bond isa Premium Bond. Thus, the Yield to Maturity (YTM) is greater thanthe Yield to Call (YTC).Related Questions
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