Question

A firm's bonds have a maturity of 12 years with a $1,000 face value, have an 11% semiannual coupon, are callable in 6 years at $1,200.96, and currently sell at a price of $1,351.36.

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?

1. Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC.
2. Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC.
3. Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.
4. Investors would expect the bonds to be called and to earn the YTC 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 greater than the YTM.

Answer 1

a.Using financial calculator, enter

FV=1000

N=12*2=24

PMT= 11%*1000/2= 55

PV=-1351.36

Solve for I/Y as 3.3470

YTM= 3.3470%*2=6.69%

b.Using financial calculator, enter

FV=1200.96

N=6*2=12

PMT= 11%*1000/2= 55

PV=-1351.36

Solve for I/Y as 3.2990

YTC= 3.2990%*2= 6.60%

C. III

As the YTC is lower than the YTM, the bonds are expected to be called and new bonds issued by the issuer in their place. This will allow the issuer to issue new debt at lower cost.

Options I and II are incorrect since if the bonds are called, the YTC is earned and not YTM.

Option IV is incorrect since if the YTM is lesser than YTM the bonds will not be called.

Option V is incorrect since YTC is lower than YTM and is not higher.