Question

A 30-year maturity 10% coupon bond paying coupons semiannually is callable in 10 years at a call price of $1,200. The bond currently sells at a yield to maturity of 5%.

a) What is the selling price of the bond at present?

b) What is the yield to call?

c) Suppose that the investor decided to hold the bond only for 5 years. The reinvestment rate of coupon payments is 8.5%. The forecasted yield to maturity by the end of the investment horizon is 6%. i. What is the selling price of the bond at the end of the investment horizon if it will not be called? ii. What is the return on investment during the holding period?

d) Suppose that a 31-year maturity bond yields 5.05%. What is the forward rate for the thirtyfirst year?

Answer #1

a) Price can be calculated using PV function on a calculator

N = 30 x 2 = 60, PMT = 10% x 1000 / 2 = 50, FV = 1000, I/Y = 5%/2 = 2.5%

=> Compute PV = $1,772.72

b) Yield to call can be calculated using I/Y function on a calculator

N = 10 x 2 = 20, PV = -1,772.72, FV = 1200, PMT = 50

=> Compute I/Y = 1.41% (semi-annual)

Annualized YTC = 1.41% x 2 = 2.82%

c) Selling Price after 5 years can be calculated using PV function

N = 25 x 2 = 50, PMT = 50, FV = 1000, I/Y = 6%/2 = 3%

=> Compute PV = $1,514.60

Future Value of all coupons reinvested at 8.5% can be calculated using FV function

N = 5 x 2 = 10, PMT = 50, I/Y = 8.5%/2 = 4.25%, PV = 0

=> Compute FV = $607.31

Return on investment = (1514.60 + 607.31) / 1772.72 - 1 = 19.70%

d) Using expectation hypothesis,

(1 + S31)^31 = (1 + S30)^30 x (1 + 30f1)

=> (1 + 5.05%)^31 = (1 + 5%)^30 x (1 + 30f1)

=> 30f1 = 6.56% is the forward rate for 31st year.

A 30-year maturity, 12% coupon bond paying coupons semiannually
is callable in ten years at a call price of $1,100. The bond
currently sells at a yield to maturity of 8%.
What is the yield to call?
What is the yield to call if the call price is only
$1,050?
What is the yield to call if the call price is $1,100 but the
bond can be called in five years instead of ten years?

A 30-year maturity, 8% coupon bond paying coupons semiannually
is callable in 5 years at a call price of $1100. The bond currently
sells at a yield to maturity (YTM) of 7% (3.5% per half-year). What
is the yield to call? How does it relate to the YTM?
Why?

An 8% coupon bond, $1,000 par value, annual payments, 10 years
to maturity is callable in 7 years at a call price of $1,200. If
the bond is selling today for $900, the yield to call is closest
to

Suppose GM has an 8% coupon rate, 30-year maturity, callable
coupon bond currently selling for 115.0 and is callable 10 years
from now at a call price of 110.0. What is the yield to call (YTC)
for the bond? (Round to two decimal places)

A 30-year U.S. 8% coupon bond with 25 years left to maturity is
callable in 16 years. The call premium is 9%; if the bond is
selling today for $980, what is the yield to call?

Three years ago, Jack’s Automotive Jacks issued a 20-year
callable bond with a $1,000 maturity value and an 8.5 percent
coupon rate of interest. Interest is paid semiannually. The bond is
currently selling for $1,046. * SET TO 4 DECIMAL
PLACES*
(a) What is the bond’s yield to maturity?
(b) If the bond can be called in four years for a redemption
price of $1,089, what is the bond’s yield to call?

5. Suppose that you bought a 14% Drexler bond with time to
maturity of 9 years for $1,379.75 (semiannual coupons, interest
rate=8%). After another ½ year, you sold the bond.
a. Assuming that the required rate of return remained at 8%,
what would the selling price be? What is the rate of return from
this investment?
b. Assuming that the required rate of return decreased to 7.5%,
what would the selling price be? What is the rate of return from...

A $1,000 par, 8%, 10 year bond, which pays semiannual coupons.
The bond is callable in 5 years at a call price of $1,050. If the
current price of the bond is $1,100, what is its yield to maturity
(YTM)?

16. Suppose that an investor with a five-year investment
horizon is considering purchasing a seven-year 7% coupon bond
selling at par. The investor expects that he can reinvest the
coupon payments at an annual interest rate of 9.4% and that at the
end of the investment horizon two- year bonds will be selling to
offer a yield to maturity of 11.2%. What is the total return on
this investment? Hint: Draw the cashflows of the 7 year bond. Using
Par...

Three years ago, Jack's automotive issued a 10 year callable
bond with a $1000 maturity value and a 7.75% coupon rate of
interest. Interest is paid semi- annually. The bond, which
matures in fives years, is currently selling for
$1065.
A. whist is the bond's yield to maturity?
B. If the bond can be called in 2 years for a call price of
$1090, which is the bond's yield to call?

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 15 minutes ago

asked 22 minutes ago

asked 34 minutes ago

asked 37 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago

asked 2 hours ago