Question

A(n) 9.5​%, ​25-year bond has a par value of​ $1,000 and a call price of $1,100. ​(The bond's first call date is in 5​ years.) Coupon payments are made semiannually​ (so use semiannual compounding where​ appropriate).

a. Find the current​ yield, YTM, and YTC on this​ issue, given that it is currently being priced in the market at $1,225. Which of these 3 yields is the​ highest? Which is the​ lowest? Which yield would you use to value this​ bond? Explain.

b. Repeat the 3 calculations​ above, given that the bond is being priced at ​$875. Now which yield is the​ highest? Which is the​ lowest? Which yield would you use to value this​ bond? Explain.

a. If the bond is priced at ​$1,225, the current yield is __ % (Round to two decimal​ places.)

The annual​ yield-to-maturity with semiannual compounding is __ % (Round to two decimal​ places.)

The annual​ yield-to-call with semiannual compounding is __ % (Round to two decimal​ places.)

b. If the bond is priced at $875, the current yield is __ % (Round to two decimal​ places.)

The annual​ yield-to-maturity with semiannual compounding is __ % (Round to two decimal​ places.)

The annual​ yield-to-call with semiannual compounding is __ % (Round to two decimal​ places.)

Answer 1

a)
1.
Current yield=9.5%*1000/1225=7.75510204081633%

2.
Yield to Maturity=RATE(25*2,9.5%*1000/2,-1225,1000)*2=7.4950%

3.
Yield to Call=RATE(5*2,9.5%*1000/2,-1225,1100)*2=5.9738%

4.
Current yield is the highest

5.
Yield to call is the lowest

6.
Use Yield to call to value the bond

b)
1.
=9.5%*1000/875=10.8571428571429%

2.
=RATE(25*2,9.5%*1000/2,-875,1000)*2=10.9737%

3
=RATE(5*2,9.5%*1000/2,-875,1100)*2=14.5328%

4.
Yield to call is the highest

5.
Current yield is the lowest

6.
Use Yield to maturity to value the bond