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 $1,230.

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.

%

Answer 1

(a)

Number of Periods to Maturity = 10*2 = 20 semiannual periods

PMT = 13%*1000/2 = $65

Par Value= $1000

Market Price = $1230

Yield to Maturity = 2* (PMT + (Par Value - Market Price)/Number of Periods to Maturity) / ((Par Value + Market Price)/2)

= 2 * (65 + (1000 - 1230)/20) / ((1000 + 1230)/2) = 0.0960 or 9.60%

(b)

Number of Periods to call = 6*2 = 12 semiannual periods

PMT = 13%*1000/2 = $65

Par Value= $1000

Call Price = $1065

Yield to Call = 2* (PMT + (Par Value - Call Price)/Number of Periods to call) / ((Par Value + Call Price)/2)

= 2 * (65 + (1000 - 1065)/12) / ((1000 + 1065)/2) = 0.1154 or 11.54%