A 25-year, 8% semiannual coupon bond with a par value of $1,000 may be called in
ID: 2741383 • Letter: A
Question
A 25-year, 8% semiannual coupon bond with a par value of $1,000 may be called in 4 years at a call price of $1,100. The bond sells for $950. (Assume that the bond has just been issued.)
What is the bond's yield to maturity? Round your answer to two decimal places.
%
What is the bond's current yield? Round your answer to two decimal places.
%
What is the bond's capital gain or loss yield? Loss should be indicated with minus sign. Round your answer to two decimal places.
%
What is the bond's yield to call? Round your answer to two decimal places.
%
Explanation / Answer
Answer :-
1.) Interest rate = semi - annually
Coupon (C) = 8% annually = 8% / 2 = 4% semi - annually
= 4% of 1000
= 40
Face Value (F) = 1000
Current Price (P) = 950
Call Price (P1) = 1100
Years (n) = 4 years = 4 * 2 = 8 semi- annually
1.) YTM = [ C + ( F - P ) / n ] / [ ( F + P ) / 2 ]
= [ 40 + (1000-950) / 8 ] / [(1000+950) / 2]
= [ 40 + 6.25 ] / [ 975 ]
= 4.74% semi-annually
2.) Current Yield = Annual Coupon / Current bond price
= 40 / 950
= 4.21%
4.) YTC = [ C + ( P1 - P ) / n ] / [ ( P1 + P ) / 2 ]
= [ 40 + (1100-950) / 8 ] / [(1100+950) / 2]
= [ 40 + 18.75 ] / [ 1025 ]
= 5.73% semi-annually
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