Question

Last year Carson Industries issued a 10-year, 13% semiannual coupon bond at its par value of $1,000. Currently, the bond can be called in 6 years at a price of $1,065 and it sells for $1,200.

a. What is the bond's nominal yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places.

%?

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

b. Is this yield affected by whether the bond is likely to be called?

1. If the bond is called, the current yield and the capital gains yield will remain the same but the coupon rate will be different.
2. If the bond is called, the current yield will remain the same but the capital gains yield will be different.
3. If the bond is called, the current yield and the capital gains yield will remain the same.
4. If the bond is called, the capital gains yield will remain the same but the current yield will be different.
5. If the bond is called, the current yield and the capital gains yield will both be different.

c. What is the expected capital gains (or loss) yield for the coming year? Use amounts calculated in above requirements for calcuation, if reqired. Round your answer to two decimal places. Enter a loss percentage, if any, with a minus sign.
%

Is this yield dependent on whether the bond is expected to be called?

1. If the bond is expected to be called, the appropriate expected total return will not change.
2. The expected capital gains (or loss) yield for the coming year depends on whether or not the bond is expected to be called.
3. The expected capital gains (or loss) yield for the coming year does not depend on whether or not the bond is expected to be called.
4. If the bond is expected to be called, the appropriate expected total return is the YTM.
5. If the bond is not expected to be called, the appropriate expected total return is the YTC.

Answer 1

use rate formuale in excel to find the bond yield to maturity
=rate(nper,pmt,pv,fv,type)
=rate(10*2,(1000*13%/2),-1200,1000,0) (Here period is multiplied by 2 since it is semiannual bond)
=4.91%
bonds nominal yield to maturity=4.91%*2=9.82%

use rate formuale in excel to find the bond nominal yield to call
=rate(nper,pmt,pv,fv,type)
=rate(6*2,(1000*13%/2),-1200,1065,0)
=4.70%
bonds nominal yield to call=4.70%*2=9.39%

b)Current yiled= coupon payment/current price
=130/1200=10.83%
this will remain same if bond is called or not
Capital yiled=YTM-current yield and we can see that YTM is different when bond is called or not
so it is option II

c)Yes it is dependend on if bond is called or not
so it is option II
if bond is not called:
capital yield=9.82%-10.83%=-1.01%
if bond is called
Capital gain yiled=9.39%-10.83%=-1.44%