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Problem Walk-ThroughProblem Walk-ThroughProblem Walk-ThroughProblem Walk-ThroughProblem Walk-ThroughProblem Walk-ThroughProblem Walk-Through Problem Walk-ThroughProblem Walk-ThroughProblem Walk-ThroughProblem Walk-Through Problem 7-3 Bond valuation Nungesser Corporation's outstanding bonds have a $1,000 par value, a 12% semiannual coupon, 19 years to maturity, and an 8% YTM. What is the bond's price? Round your answer to the nearest cent. $ 5. Problem 7-4 Yield to maturity A firm's bonds have a maturity of 14 years with a $1,000 face value, have an 11% semiannual coupon, are callable in 7 years at $1, 227, and currently sell at a price of $1,391.23. 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 cam on these bonds? I. Investors would expect the bonds to be called and to cam the YTC because the YTM is less than the YTC. II. Investors would expect the bonds to be called and to cam the YTC because the YTC is greater than the YTM. III. Investors would not expect the bonds to be called and to cam the YTM because the YTM is greater than the YTC. IV. Investors would not expect the bonds to be called and to cam the YTM because the YTM is less than the YTC. V. Investors would expect the bonds to be called and to cam the YTC because the YTC is less than the YTM.

Explanation / Answer

Part 4)

The bond's price can be calculated with the use of Present Value (PV) function/formula of EXCEL/Financial Calculator. The function/formula for PV is PV(Rate,Nper,PMT,FV) where Rate = YTM, Nper = Period, PMT = Coupon Payment and FV = Face Value of Bond.

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Here, Rate = 8%/2 = 4%, Nper = 19*2 = 38, PMT = 1,000*12%*1/2 = $60 and FV = $1,000 [we use 2 since the bond is semi-annual]

Using these values in the above function/formula for PV, we get,

Bond Price (PV) = PV(4%,38,60,1000) = $1,387.36 or $1,387.4

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Part 5)

Problem 7-4)

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Part a)

The nominal yield to maturity can be calculated with the use of Rate function/formula of EXCEL/Financial Calculator. The function/formula for Rate is Rate(Nper,PMT-PV,FV) where Nper = Period, PMT = Coupon Payment, PV = Present Value and FV = Face Value of Bond.

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Here, Nper = 14*2 = 28, PMT = 1,000*11%*1/2 = $55, PV = $1,391.23 and FV = $1,000 [we use 2 since the bond is semi-annual]

Using these values in the above function/formula for Rate, we get,

Nominal Yield to Maturity (Rate) = Rate(28,55,-1391.23,1000)*2 = 6.66% or 6.7%

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Part b)

The nominal yield to call can be calculated with the use of Rate function/formula of EXCEL/Financial Calculator. The function/formula for Rate is Rate(Nper,PMT-PV,FV) where Nper = Period, PMT = Coupon Payment, PV = Present Value and FV = Call Price of Bond.

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Here, Nper = 7*2 = 14, PMT = 1,000*11%*1/2 = $55, PV = $1,391.23 and FV = $1,227 [we use 2 since the bond is semi-annual]

Using these values in the above function/formula for Rate, we get,

Nominal Yield to Call (Rate) = Rate(14,55,-1391.23,1227)*2 = 6.55% or 6.6%

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Part c)

Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM (which is Option V)

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Explanation:

The bonds have been issued at a premium and for such bonds the yield to call will always be lower than its yield to maturity. Since, YTC is less than YTM, the company would prefer to call the bonds in order to take the advantage of the declining interest rate. Therefore, investors would expect the bonds to be called and earn YTC.

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