On April 1, 2016, you consider the purchase of an outstanding bond that was issu
ID: 2757768 • Letter: O
Question
On April 1, 2016, you consider the purchase of an outstanding bond that was issued on April 1, 2015 for 30 years. It has an 8% annual coupon. Thus, it matures April 1, 2045!!! It has five years of call protection when it was issued, which is until April 2020, at which time it can be called in with an 8% call premium. Interest rates have declined since it was issued a year ago, and it is now selling for 115.875% of its par value of $1,000.
What is the YTM? Please show work.
What is the YTC? Please show work
If you decide to purchase the bond, which return would you expect to earn if the interest rates remain less than 8%, the YTM or YTC? Circle YTM or YTC Explain your answer.
Explanation / Answer
Face value (FV) $ 1,000.00 Coupon rate 8.00% Number of compounding periods per year 1 Interest per period (PMT) $ 80.00 Bond price (PV) $ (1,158.75) Number of years to maturity 29 Number of compounding periods till maturity (NPER) 29 Bond Yield to maturity RATE(NPER,PMT,PV,FV) Bond Yield to maturity 6.74% Call price (Here it is FV) $ 1,080.00 Coupon rate 8.00% Number of compounding periods per year 1 Interest per period (PMT) $ 80.00 Bond price (PV) $ -1,158.75 Number of years to call 4 Number of compounding periods till call (NPER) 4 Bond Yield to call RATE(NPER,PMT,PV,FV) Bond Yield to call 5.34%
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