Question

1. Dr. Power has been offered some 15-years maturity bonds that cost her $1,210 each with an annual coupon rate of 7% compounding quarterly. Unfortunately, those bonds are callable in 7 years at 1,300. She was wondering about the yield curve but her son who is the financial advisor to, Mr. Power, the richest man in Sioux City, confirmed that the yield curve will still remain horizontal with rates expected to remain at current levels onto the future. Under these conditions, what rate of return should Dr. Anne expect to earn if she purchases these bonds?

Answer 1

Bond pricing
Current price	1210
Coupon	7%
Compounding	quarterly
Term	15	yrs
Periods	60
YTM	5.00%	RATE(60,1000*7%/4,-1210,1000,)*4
Now since YTM is likely to be flat, so lets calculate the YTC
Current price	1210
Coupon	7%
Compounding	quarterly
Term to call	7	yrs
Periods	60
Call price	1300
YTC	6.63%	RATE(28,1000*7%/4,-1210,1300,)*4
The YTC is higher than YTM, so investor will earn the lower return and likely rate of return is 5.00%