Question

Kauffman has bonds outstanding with a face value of $1,000 and 10 years left until maturity....

Kauffman has bonds outstanding with a face value of $1,000 and 10 years left until maturity. They have an 11% annual coupon payment, and their current price is $1,175.

1. What is the yield to maturity?

2. What is the yield to call if they are called in 5 years, 6 years, 7 years and 9 years?

3. Which yield might investors expect to earn onb the bonds? Why?

4. The bond's indenture that the call provision gives the firm the right to call the bonds at the end of each year beginning in year 5. In year 5, the bonds may be called at 109% of face value; but in each of the 4 years, the call percentage will decline by 1%. Thus, in year 6, they may be called at 108% of face value; in year 7 they may be called at 107% of face value; and so forth. If the yield curve is horizontal and interest rates remain at their current level, when is the latest that investors might expect the firm to call the bonds?

Business   Accounting   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

1-

YTM

Using rate function in MS excel

rate(nper,pmt,pv,fv,type) = nper = 10 pmt = 110 pv= -1175 fv =1000 type = 0

RATE(10,110,-1175,1000,0)

8.35%

2-

YTC if called in Year 5

Using rate function in MS excel

rate(nper,pmt,pv,fv,type) = nper = 5 pmt = 110 pv= -1175 fv =1090 type = 0

RATE(5,110,-1175,1090,0)

8.13%

YTC if called in Year 6

Using rate function in MS excel

rate(nper,pmt,pv,fv,type) = nper = 6 pmt = 110 pv= -1175 fv =1080 type = 0

RATE(6,110,-1175,1080,0)

8.27%

YTC if called in Year 7

Using rate function in MS excel

rate(nper,pmt,pv,fv,type) = nper = 7 pmt = 110 pv= -1175 fv =1070 type = 0

RATE(7,110,-1175,1070,0)

8.37%

YTC if called in Year 8

Using rate function in MS excel

rate(nper,pmt,pv,fv,type) = nper = 8 pmt = 110 pv= -1175 fv =1060 type = 0

RATE(8,110,-1175,1060,0)

8.46%

YTC if called in Year 9

Using rate function in MS excel

rate(nper,pmt,pv,fv,type) = nper = 9 pmt = 110 pv= -1175 fv =1050 type = 0

RATE(9,110,-1175,1050,0)

8.53%

3-

Investor prefer to take YTC at call option at year 9 as it results in highest rate of return (YTC = 8.53%)

4-

Firm will call the bonds in the year 6th because at this point firm because This is the last year that the expected YTC will be less than the expected YTM. At this time, the firm still finds an advantage to calling the bonds, rather than seeing them to maturity
0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Kauffman has bonds outstanding with a face value of $1,000 and 10 years left until maturity....
Kauffman has bonds outstanding with a face value of $1,000 and 10 years left until maturity. They have an 11% annual coupon payment, and their current price is $1,175. A. What is the yield to maturity? B. What is the yield to call AND the yield to maturity if they are called in 5 years, 6 years, 7 years and 9 years? Prepare in excel for (a, b and d). C. Which yield might investors expect to earn on the...
Kempton Enterprises has bonds outstanding with a $1,000 face value and 10 years left until maturity....
Kempton Enterprises has bonds outstanding with a $1,000 face value and 10 years left until maturity. They have an 11% annual coupon payment, and their current price is $1,175. The bonds may be called in 5 years at 109% of face value (Call price = $1,090). What is the yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places.   % What is the yield to call if they are called in 5 years? Do not...
Kempton Enterprises has bonds outstanding with a $1,000 face value and 10 years left until maturity....
Kempton Enterprises has bonds outstanding with a $1,000 face value and 10 years left until maturity. They have an 10% annual coupon payment, and their current price is $1,185. The bonds may be called in 5 years at 109% of face value (Call price = $1,090). What is the yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places. ______% What is the yield to call if they are called in 5 years? Do not...
YIELD TO MATURITY AND YIELD TO CALL Kempton Enterprises has bonds outstanding with a $1,000 face...
YIELD TO MATURITY AND YIELD TO CALL Kempton Enterprises has bonds outstanding with a $1,000 face value and 10 years left until maturity. They have an 12% annual coupon payment, and their current price is $1,175. The bonds may be called in 5 years at 109% of face value (Call price = $1,090). What is the yield to maturity? Round your answer to two decimal places. % What is the yield to call if they are called in 5 years?...
THIS IS THE QUESTION YIELD TO MATURITY AND YIELD TO CALL Kempton Enterprises has bonds outstanding...
THIS IS THE QUESTION YIELD TO MATURITY AND YIELD TO CALL Kempton Enterprises has bonds outstanding with a $1,000 face value and 10 years left until maturity. They have an 11% annual coupon payment, and their current price is $1,185. The bonds may be called in 5 years at 109% of face value (Call price = $1,090). a. What is the yield to maturity? b. What is the yield to call if they are called in 5 years? c. Which...
THIS IS THE QUESTION YIELD TO MATURITY AND YIELD TO CALL Kempton Enterprises has bonds outstanding...
THIS IS THE QUESTION YIELD TO MATURITY AND YIELD TO CALL Kempton Enterprises has bonds outstanding with a $1,000 face value and 10 years left until maturity. They have an 11% annual coupon payment, and their current price is $1,185. The bonds may be called in 5 years at 109% of face value (Call price = $1,090). a. What is the yield to maturity? b. What is the yield to call if they are called in 5 years? c. Which...
Arnot International's bonds have a current market price of $1,350. The bonds have an 11% annual...
Arnot International's bonds have a current market price of $1,350. The bonds have an 11% annual coupon payment, a $1,000 face value, and 10 years left until maturity. The bonds may be called in 5 years at 109% of face value (call price = 1,090). a) What is the yield to maturity? Round your answer to two decimal places. % b) What is the yield to call if they are called in 5 years? Round your answer to two decimal...
Decisions involving capital expenditures often require managers to weigh the costs and benefits of different options...
Decisions involving capital expenditures often require managers to weigh the costs and benefits of different options related to the financing of a project. For instance, deciding when to call a bond before maturity due to changing interest rates can lower the overall cost of a project significantly through refinancing. So, it is important to be able to understand the real interest rate being paid out to your bondholders (yield) at any given time. You will utilize the information in this...
A firm's bonds have a maturity of 10 years with a $1,000 face value, have an...
A firm's bonds have a maturity of 10 years with a $1,000 face value, have an 8% semiannual coupon, are callable in 5 years at $1,049.82, and currently sell at a price of $1,096.40. What are their nominal yield to maturity and their nominal yield to call? Do not round intermediate calculations. Round your answers to two decimal places. YTM: % YTC: % What return should investors expect to earn on these bonds? Investors would not expect the bonds to...
A firm's bonds have a maturity of 14 years with a $1,000 face value, have an...
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 $1,237.02, and currently, sell at a price of $1,406.34. What are their nominal yield to maturity and their nominal yield to call? Do not round intermediate calculations. Round your answers to two decimal places. YTM: % YTC: % What return should investors expect to earn on these bonds? Investors would expect the bonds to be...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT