Question

A firm's bonds have a maturity of 8 years with a $1,000 face value, have an 11% semiannual coupon, are callable in 4 years at $1,149, and currently sell at a price of $1,275.86. What is their nominal yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places. % What is their nominal yield to call? Do not round intermediate calculations. Round your answer to two decimal places. % What return should investors expect to earn on these bonds? Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC. Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC. Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM. Investors would expect the bonds to be called and to earn the YTC because the YTM is less than the YTC. Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM.

Answer 1

A: Using financial calculator

Input:

N = 8*2 = 16

Fv = 1000

PMT= 11%*1000/2 = 55

PV = -1275.86

Solve for I/Y = 3.26

Hence YTM = 3.26%

B: Using financial calculator

Input:

N = 4*2 = 8

Fv = 1149

PMT= 11%*1000/2 = 55

PV = -1275.86

Solve for I/Y = 3.2

Hence YTC = 3.2%

C: Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.

Since the YTC is lesser than YTM, the issuer will probably call the bonds and reissue new debt to take advantage of lower cost of debt.