Question

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 maturity (YTM)? Round your answer to two decimal places. Do not round intermediate calculations.

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

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

The firm call the bond.

Answer 1

Now, YTC < YTM. Since YTC is lower than YTM, it is beneficial for company to call the bond. YTC/YTM is the cost of debt for company. Action of company to call or not call would depend upon the comparison of YTM and YTC. Had YTM been lower, it would have been beneficial for company to not call the bond and keep it. For this question, hence, company should call the bond.

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I have shown the Excel calculations here. YTM/YTC calculation can be calculated on exact basis only through Excel or financial calculator. Manual calculations can be done only to calculate approxiamte YTM or YTC. You can use the formulas:

Just remember, use periodic information in here, like Coupon should be semi-annual, maturity/call period should also be periodic.