Last year Clark Company issued a 10-Year, 12.5% semiannual Coupon Bond at its Pa
ID: 2768100 • Letter: L
Question
Last year Clark Company issued a 10-Year, 12.5% semiannual Coupon Bond at its Par Value of $1,000. Currently the Bond can be called in four (4) years at a price of $1,065 and it sells for $1,105. What are the Bond's nominal Yield to Maturity and its nominal Yield to Call? Would an investor be more likely to earn the YTM or the YTC? YTM YTC YTM or YTC? What is the Current Yield? Is this yield affected by whether the Bond is likely to be called? Take a look-see at Footnote 7 and Table7.1) Current Yield Affected by the Call/Yes or no What is the expected capital gains(or loss) yield for the coming year? Is this Yield dependent on whether the bond is expected to be called? Expected Capital Gains Yield/Loss Dependent on the Expectation for the Call? Yes or No.Explanation / Answer
Answer:a YTM : PV= -$1105, PMT = c*FV/M = 12.5%*1000/2 = $62.5, FV = face value = $1 000, N= M×N= 2×9=18 => YTM = I/Y×2= 5.33%×2=10.66%
YTC: PV= -$1105, PMT = c*FV/M = 12.5%*1000/2 = $62.5, FV = face value = $1065, N= M×N= 2×4= 8
=> YTM = I/Y×2= 5.28%×2=10.56%
The bond is likely to be recalled!
Answer: b. Current yield = coupon payment/current price=$125/$1105=11.3122%
The current yield will remain the same. It is not sensitive to interest rate changes.
Answer: c. If the bond will not be called:
Expected capital gain yield=YTM-Current yield
=10.66%-11.31%=-0.65%
If the bond will be called:
Expected capital gain yield=YTD-Current yield
=10.56%-11.31%=-0.75%
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