It is now January 1,2009, and you are considering the purchase of an outstanding

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, 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 to two decimal places)

b) What is the yield to call? (Round your answer to two decimal places)


*please show how to derive answer, thanks!

Explanation / Answer

a). Yield to maturity: Here we can calculate the yeild to maturity by using the "Rate" function in the MS EXCEL. (click on fromula bar and enter rate function in excel to calculate ytm) To calculate the YTM we have to enter the following information in the rate function as follows; Nper (years to maturity) = 20 pmt (annual payment) (9%) = 90 pv (present value) (1141.2) = -1141.2 fv (future value) = 1000 after entering the above information in the table click on enter to get the yeild to maturity. now you should get the result of yeild to maturity = 7.60% b). Yeild to call: The yeild to call also can be calculated  by using the "Rate" function in the MS EXCEL. (click on fromula bar and enter rate function in excel to calculate ytc) To calculate the YTC we have to enter the following information in the rate function as follows; Nper (call protection period) = 5 pmt (annual payment) (9%) = 90 pv (present value) (1141.2) = -1141.2 fv (future value) = 1000 after entering the above information in the table click on enter to get the yeild to call. now you should get the result of yeild to call = 5.68% The yeild to call also can be calculated  by using the "Rate" function in the MS EXCEL. (click on fromula bar and enter rate function in excel to calculate ytc) To calculate the YTC we have to enter the following information in the rate function as follows; Nper (call protection period) = 5 pmt (annual payment) (9%) = 90 pv (present value) (1141.2) = -1141.2 fv (future value) = 1000 after entering the above information in the table click on enter to get the yeild to call. now you should get the result of yeild to call = 5.68% The yeild to call also can be calculated  by using the "Rate" function in the MS EXCEL. (click on fromula bar and enter rate function in excel to calculate ytc) To calculate the YTC we have to enter the following information in the rate function as follows; Nper (call protection period) = 5 pmt (annual payment) (9%) = 90 pv (present value) (1141.2) = -1141.2 fv (future value) = 1000 after entering the above information in the table click on enter to get the yeild to call. now you should get the result of yeild to call = 5.68%

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