Question

A firm's bonds have a maturity of 12 years with a $1,000 face value, have an 8% semiannual coupon, are callable in 6 years at $1,061.57, and currently sell at a price of $1,116.57. What are their nominal yield to maturity and their nominal yield to call? Do not round intermediate calculations. Round your answers to two decimal places.

YTM:   %

YTC:   %

What return should investors expect to earn on these bonds?

1. Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM.
2. Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC.
3. Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC.
4. Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.

Answer 1

Ans:- we will use the RATE function of excel to find the YTM and YTC.

For YTM, Nper=12*2=24, Pmt=$1000*8%/2=$40, PV=-$1,116.57, FV=$1000.

For YTC, Nper=6*2=12, Pmt=$1000*8%/2=$40, PV=-$1,1061.57, FV=$1000.

Ans:-(b) Investors would expect the bonds to be called and earn the YTC because YTC is less than YTM. If the bond issuer does not call the bond until maturity it has to give a greater return or yield (6.58%) to the investor because YTM is greater than the YTC (6.48%), therefore it will call the bond by paying less return to the investor.

Therefore, option (iv) is the right answer.

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