Question

Yield to maturity

A firm's bonds have a maturity of 14 years with a $1,000 face value, have an 8% semiannual coupon, are callable in 7 years at $1,076, and currently sell at a price of $1,140.50.

- What is their nominal yield to maturity? Round your answer to
two decimal places.

% - What is their nominal yield to call? Round your answer to two
decimal places.

% - What return should investors expect to earn on these
bonds?

- 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.
- 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.

Answer #1

a). To find the YTM, we need to put the following values in the financial calculator:

INPUT | 14*2=28 | -1,140.50 | (8%/2)*1,000=40 | 1,000 | |

TVM | N | I/Y | PV | PMT | FV |

OUTPUT | 3.23 |

Hence, YTM = 2r = 2 x 3.23% = 6.46%

b). To find the YTC, we need to put the following values in the financial calculator:

INPUT | 7*2=14 | -1,140.50 | (8%/2)*1,000=40 | 1,076 | |

TVM | N | I/Y | PV | PMT | FV |

OUTPUT | 3.18 |

Hence, YTM = 2r = 2 x 3.18% = 6.36%

c). Statement "V" is correct.

Since the YTC is less than the YTM, investors would expect the bonds to be called and to earn the YTC.

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