Question

Yield to Maturity and Call with Semiannual Payments

Thatcher Corporation's bonds will mature in 10 years. The bonds have a face value of $1,000 and an 8% coupon rate, paid semiannually. The price of the bonds is $1,100. The bonds are callable in 5 years at a call price of $1,050. Do not round intermediate calculations. Round your answers to two decimal places.

What is their yield to maturity?
  %

What is their yield to call?
  %

Answer 1

Answer :

1) Yield to maturity ( YTM ) :

Given that,

Face value = 1000

Annual coupon rate = 8%

Years to maturity = 10

Value of bond = 1100

Payment frequency = 2

Now,

To find YTM , we can use RATE function in Excel as follows :

NPER = 10 * 2 = 20

PMT = 1000 * 8% / 2 = 40

PV = -1100

FV = 1000

Therefore,

YTM =RATE(NPER,PMT,PV,FV)*2

=RATE(20,40,-1100,1000)*2

YTM = 6.62%

2) Yield to Call ( YTC ) :

Given that,

Call value = 1050

Annual coupon rate = 8%

Years to maturity = 5

Value of bond = 1100

Payment frequency = 2

Now,

To find YTC , we can use RATE function in Excel as follows :

NPER = 5 * 2 = 10

PMT = 1000 * 8% / 2 = 40

PV = -1100

FV = 1050

Therefore,

YTC =RATE(NPER,PMT,PV,FV)*2

=RATE(10,40,-1100,1050)*2

YTC = 6.49%