Question

Last year Carson Industries issued a 10-year, 13% semiannual coupon bond at its par value of $1,000. Currently, the bond can be called in 6 years at a price of $1,065 and it sells for $1,200. What is the bond's nominal yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places. % What is the bond's nominal yield to call? Do not round intermediate calculations. Round your answer to two decimal places. % Would an investor be more likely to earn the YTM or the YTC? What is the current yield? (Hint: Refer to Footnote 7 for the definition of the current yield and to Table 7.1.) Round your answer to two decimal places. % Is this yield affected by whether the bond is likely to be called? If the bond is called, the current yield and the capital gains yield will both be different. If the bond is called, the current yield and the capital gains yield will remain the same but the coupon rate will be different. If the bond is called, the current yield will remain the same but the capital gains yield will be different. If the bond is called, the current yield and the capital gains yield will remain the same. If the bond is called, the capital gains yield will remain the same but the current yield will be different.

Answer 1

n=9*2=18
Pmt= 0.13*1000/2=65
Fv=1000
PV=-1200

YTM:
=RATE(18,65,-1200,1000)
=9.63%

YTC:
n=12, pv=-1200, fv=1065

=RATE(12,65,-1200,1065)
=9.39%

Since YTM>YTC, the investor is likely to earn YTC as it is lower nad hence bond is likely to be called


Current yield = 130/1200=10.83%

Current yield is not affected by bond being recalled.

Correct option:

If the bond is called, the current yield will remain the same but the capital gains yield will be different.