BCC has issued 8 1/8 percent debentures that will mature in July 15, 2030. Assum

Question

BCC has issued 8 1/8 percent debentures that will mature in July 15, 2030. Assume that interest paid is paid and compounded annually. If an investor purchased $1,000 denomination bond for $1025 on July 15, 2010, determine the bonds yield to maturity. Explain why an investor would be willing to pay $1025 for a bond that is going to be worth only $1000 at maturity.

Part B Consider again the BCC 8 1/8 percent debentures that mature on July 15, 2030 (see problem 6). Determine the yield to call if the bonds are called on July 15, 2016, at $1015.55.

Explanation / Answer

We have Face Value FV = $1000 Coupon = 8 1/8% =8.125% Annual. So PMT = Coupon*FV = 8.125%*$1000 = 81.25 Period = nper = 2030-2010 = 20 Yrs Purch Price = PV = $1025, What is YTM (Rate) So YTM = Rate(nper,PMT,PV,FV) = Rate(20,81.25,-1025,1000) = 7.87% The YTM is actually the current interest rate on a particular bond or similar bonds. If a 8.125%% bond is availale, but current interest rates are actually less than 8.125% say 7%, the broker or the market will price that bond higher (premium) - to reflect the current interest rate environment. The broker is not going to sell a 8.125% bond at par when interest rates are lower at 7%. A premium will be the market An existing bond’s market value will increase when the market interest rates decrease. An existing bond becomes more valuable because its fixed interest payments are larger than the interest payments currently demanded by the market YTC : CUrrent price = PV = $1025, Call price = FV = $1015.55 Period = nper = 2016-2010 = 6, PMT = 81.25 So YTC = Rate(nper,PMT,PV,FV) = Rate(6,81.25,-1025,1015.55) = 7.80%

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