Question

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 $1,236.00, and currently sell at a price of $1,406.80. What is their nominal yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places.

__________%

What is their nominal yield to call? Do not round intermediate calculations. Round your answer to two decimal places.

_________%

What return should investors expect to earn on these bonds?

A) Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC.

B) Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.

C) Investors would expect the bonds to be called and to earn the YTC because the YTM is less than the YTC.

D) Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM.

E) Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC.

Answer #1

B) Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.

calc:

As the YTC < YTM, the company is better off calling the bond and reissuing the bonds again at a lower market rate, but the investors will be disappointed as now they will have to reinvest their money at a lower rate than what they were earning(they were earning YTM)

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