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.

1. What is their nominal yield to maturity? Round your answer to two decimal places.
   
   %
   
2. What is their nominal yield to call? Round your answer to two decimal places.
   
   %
   
3. What return should investors expect to earn on these bonds?
   
   1. Investors would expect the bonds to be called and to earn the YTC because the YTM is less than the YTC.
   2. Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM.
   3. Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC.
   4. Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC.
   5. 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.