Question

Unlike the coupon interest rate, which is fixed, a bond’s yield varies from day to day depending on market conditions. To be most useful, it should give us an estimate of the rate of return an investor would earn if that investor purchased the bond today and held it for its remaining life. There are three different yield calculations: Current yield, yield to maturity, and yield to call.

A bond’s current yield is calculated as the annual interest payment divided by the current price. Unlike the yield to maturity or the yield to call, it does not represent the actual return that investors should expect because it does not account for the capital gain or loss that will be realized if the bond is held until it matures or is called. This yield was popular before calculators and computers came along because it was easy to calculate; however, because it can be misleading, the yield to maturity and yield to call are more relevant.

The yield to maturity (YTM) is the rate of return earned on a bond if it is held to maturity. It is the interest rate that forces the present value of the bond to equal the present values of the interest payments received during the life of the bond and the maturity value received at the bond’s maturity. Calculate YTM using a financial calculator by entering the number of payment periods until maturity for N, the price of the bond for PV, the interest payments for PMT, and the maturity value for FV. Then solve for I/YR = YTM. Remember, you need to make the appropriate adjustments for a semiannual bond and realize that the calculated I/YR is on a periodic basis so you will need to multiply the rate by 2 to obtain the annual rate. In addition, you need to make sure that the signs for PMT and FV are identical and that the opposite sign is used for PV; otherwise, your answer will be incorrect.

The yield to call (YTC) is the rate of return earned on a bond when it is called before its maturity date. The equation for solving for the YTC is shown below:

Calculate YTC using a financial calculator by entering the number of payment periods until call for N, the price of the bond for PV, the interest payments for PMT, and the call price for FV. Then you can solve for I/YR = YTC. Again, remember you need to make the appropriate adjustments for a semiannual bond and realize that the calculated I/YR is on a periodic basis so you will need to multiply the rate by 2 to obtain the annual rate. In addition, you need to make sure that the signs for PMT and FV are identical and the opposite sign is used for PV; otherwise, your answer will be incorrect.

A company is more likely to call its bonds if they are able to replace their current high-coupon debt with less expensive financing. A bond is more likely to be called if its price is -Select-aboveatbelowCorrect 1 of Item 1 par—because this means that the going market interest rate is less than its coupon rate.

**Quantitative Problem:** Ace Products has a bond
issue outstanding with 15 years remaining to maturity, a coupon
rate of 7.4% with semiannual payments of $37, and a par value of
$1,000. The price of each bond in the issue is $1,200.00. The bond
issue is callable in 5 years at a call price of $1,074.

What is the bond's current yield? Do not round intermediate
calculations. Round your answer to two decimal places.

%

What is the bond's nominal annual yield to maturity (YTM)? Do not round intermediate calculations. Round your answer to two decimal places.

%

What is the bond's nominal annual yield to call (YTC)? Do not round intermediate calculations. Round your answer to two decimal places.

%

Assuming interest rates remain at current levels, will the bond issue be called?

The firm -Select-shouldshould notCorrect 1 of Item 4 call the bond.

Answer #1

**Answer:**

**HAPPY TO ASSIST YOU, PLEASE "UPVOTE" THE SOLUTION IF
HELPFUL. THANK YOU :)**

Unlike the coupon interest rate, which is fixed, a bond’s yield
varies from day to day depending on market conditions. To be most
useful, it should give us an estimate of the rate of return an
investor would earn if that investor purchased the bond today and
held it for its remaining life. There are three different yield
calculations: Current yield, yield to maturity, and yield to
call.
A bond’s current yield is calculated as the annual interest
payment divided...

Calculating Yields
Unlike the coupon interest rate, which is fixed, a bond’s yield
varies from day to day depending on market conditions. To be most
useful, it should give us an estimate of the rate of return an
investor would earn if that investor purchased the bond today and
held it for its remaining life. There are three different yield
calculations: Current yield, yield to maturity, and yield to
call.
A bond’s current yield is calculated as the annual interest...

Calculate YTC using a financial calculator by entering the
number of payment periods until call for N, the price of the bond
for PV, the interest payments for PMT, and the call price for FV.
Then you can solve for I/YR = YTC. Again, remember you need to make
the appropriate adjustments for a semiannual bond and realize that
the calculated I/YR is on a periodic basis so you will need to
multiply the rate by 2 to obtain the...

Ace Products has a bond issue outstanding with 15 years
remaining to maturity, a coupon rate of 7.6% with semiannual
payments of $38, and a par value of $1,000. The price of each bond
in the issue is $1,220.00. The bond issue is callable in 5 years at
a call price of $1,076.
What is the bond's current yield? Round your answer to two
decimal places. Do not round intermediate calculations.
% What is the bond's nominal annual yield to...

3) A bond currently sells for $850. It has an
eight-year maturity, an annual coupon of $80 but paid
semi-annually, and a par value of $1,000. This bond has a
callable feature. If this bond can be called after 5 years, for
$1,025.
(1) What is its annual yield to maturity?
(2) What is its current yield?
(3) What is the bond’s nominal yield to call (YTC)?
(4) If you bought this bond, would you be more
likely to earn the YTM...

Quantitative Problem: Ace Products has a bond
issue outstanding with 15 years remaining to maturity, a coupon
rate of 8.2% with semiannual payments of $41, and a par value of
$1,000. The price of each bond in the issue is $1,260.00. The bond
issue is callable in 5 years at a call price of $1,082.
What is the bond's current yield? Do not round intermediate
calculations. Round your answer to two decimal places.
%
What is the bond's nominal annual...

A bond has a face value of $1,000, a coupon rate of 8%, and a
maturity of 10 years. The bond makes semi-annual coupon
payments. The bond’s yield to maturity is
9%. In Excel, the =PV formula can be used to find the
price of the bond. Fill in the table with the
appropriate values:
RATE
NPER
PMT
FV
TYPE
Repeat problem , but with annual coupon payments.
RATE
NPER
PMT
FV
TYPE

Quantitative Problem: Ace Products has a bond
issue outstanding with 15 years remaining to maturity, a coupon
rate of 7.2% with semiannual payments of $36, and a par value of
$1,000. The price of each bond in the issue is $1,170.00. The bond
issue is callable in 5 years at a call price of $1,072.
1.What is the bond's current yield? Do not round intermediate
calculations. Round your answer to two decimal places.
%
2.What is the bond's nominal annual...

BOND VALUATION Callaghan’s Motors’ bonds have
15 years remaining to maturity. Interest is paid
semi-annually, they have a $1,000 par value, the
coupon interest rate is 9%, and the yield to maturity is 8%. What
is the bond’s current market price?
BOND VALUATION Nungesser Corporation’s
outstanding bonds have a $1,000 par value, a 9% semiannual coupon,
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price?
BOND VALUATION and YIELD TO MATURITY Suppose a
10-year, $1000 bond...

Quantitative Problem: Ace Products has a bond
issue outstanding with 15 years remaining to maturity, a coupon
rate of 7% with semiannual payments of $35, and a par value of
$1,000. The price of each bond in the issue is $1,190.00. The bond
issue is callable in 5 years at a call price of $1,070.
What is the bond's current yield? Round your answer to two decimal
places. Do not round intermediate calculations.
%
What is the bond's nominal annual...

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