A 20-year, 8% semiannual coupon bond with a par value of $1,000 may be called in
ID: 2782388 • Letter: A
Question
A 20-year, 8% semiannual coupon bond with a par value of $1,000 may be called in 5 years at a cal price of $1,040. The bond sells for $1,100. Solve a, d, f, and e. Thank you!
A 20-year, 8% semiannual coupon bond with a par value of $1,000 may be called in 5 years at a call price of $1,040. The bond sells for $1,100. (Assume that the bond has just been issued.) Basic Input Data Years to maturity Periods per year: Periods to maturity Coupon rate Par value: Periodic payment Current price Call price Years till callable Periods till callable 20 $1,000 $1,100 $1,040 10Explanation / Answer
Answer a)
Periodic YTM=3.53%
Annualized Nominal YTM=7.06%
Answer d) Periodic YTC =3.16%
Annualized Nomial YTC =6.33%
The YTC is lower than the YTM because if the bond is called, the buyer will lose the difference between the current price in just 4 years , and the loss will offset much of the interest income.Note too that the bond called and replaced ,hence YTC will probably be earned.
Answer f)
Basic info
Settlement Today 10/25/2014
Maturity 7/1/2014 7/1/2020 Call Date
Coupon Rate 12%
Current Price (% of par) 1100
Redemption (% of par) 1000 104 Call price
Frequency (for semiannual) 2
Basics(360 or 365 day year) 1
Yield to Maturity 10.34 %
Yeild to Call 10.57%
Answer e)
Nominal Market Rate r:- 8%
Value of Bond if its not called $1000.00
Value of Bond if its called $ 1027.00
Rate r
Value of bond if
Not called $1000.00
Called $ 1027.00
Actual Value considering call likehood
0%
$2000.00
$1440.00
$1440.00
2%
$1985.04
$1320.35
$1320.35
4%
$1547.11
$1212.47
$1212.47
6%
$1231.15
$1105.07
$1105.07
8%
$1000.00
$1027.02
$1000.00
10%
$828.41
$947.34
$828.41
12%
$699.07
$875.34
$699.07
14%
$600.05
$809.63
$600.05
16%
$523.02
$750.12
$523.02
Rate r
Value of bond if
Not called $1000.00
Called $ 1027.00
Actual Value considering call likehood
0%
$2000.00
$1440.00
$1440.00
2%
$1985.04
$1320.35
$1320.35
4%
$1547.11
$1212.47
$1212.47
6%
$1231.15
$1105.07
$1105.07
8%
$1000.00
$1027.02
$1000.00
10%
$828.41
$947.34
$828.41
12%
$699.07
$875.34
$699.07
14%
$600.05
$809.63
$600.05
16%
$523.02
$750.12
$523.02
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