A firm\'s bonds have a maturity of 12 years with a $1,000 face value, have an 11
ID: 2721749 • Letter: A
Question
A firm's bonds have a maturity of 12 years with a $1,000 face value, have an 11% semiannual coupon, are callable in 6 years at $1,202, and currently sell at a price of $1,354.77.
a. What is their nominal yield to maturity? Round your answer to two decimal places.
b. What is their nominal yield to call? Round your answer to two decimal places.
c. What return should investors expect to earn on these bonds?
I. Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.
II. Investors would expect the bonds to be called and to earn the YTC because the YTM is less than the YTC.
III. Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM.
IV. Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC.
Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than V. the YTC.
Explanation / Answer
Yield to maturity is a measure of yield of a bond held to maturity
The following assumptions are taken as per details given
The par value is $1000 ,
The coupon rate is 11% on par value of bond , so the interest is $55 paidsemi -annually
The bond maturity is 12 years
The bond price is $1,354.77
We have to calculate the interest rate , which is the realized real rate of return
By using financial calculator, we can find I as interest is paid semi annually
When
N= 24
FV=1000
PV= -1354.77
PMT = 55
The i is 6.66% , the realized real rate of return
b)Yield to call is a measure of the yield of a bond if you were to hold it until the call date.
The following assumptions are taken as per details given
The call price of bond is $1,202and par value is $1000 ,
The coupon rate is 11% on par value of bond , so the interest is $55 paidsemi -annually
The bond is called in 6 years
The total years of bond is 12 years
The bond price is $1,354.77
We have to calculate the interest rate , which is the realized real rate of return
By using financial calculator, we can find I as interest is paid semi annually
When
N= 12
FV= 1202
PV= -1354.77
PMT = 55
The i is 6.56% , the realized real rate of return
c) What return should investors expect to earn on these bonds?
. Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.
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