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Company Triple A semi-annual bonds currently sell for $1,055. They have a 5.50% coupon rate and...

Company Triple A semi-annual bonds currently sell for $1,055. They have a 5.50% coupon rate and a 25-year maturity and are callable in 6 years at $1,100.00. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. Under these conditions, what rate of return should an investor expect to earn if he or she purchases these bonds, the YTC or the YTM and why?

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Answer #1

Yield to maturity of bond is calculated in excel and screen shot provided below:

Yield to maturity of bond is 5.11%.

Now,

Yield to call of bond is calculated in excel and screen shot provided below:

Yield to call of bond is 5.82%.

Since, yield curve is horizontal, with rates expected to remain at current levels on into the future and Yield to maturity of bond is less than yield to call of bond. So, bond will mature at maturity and will not call.

So, Expected return of bond is equal to yield to maturity of bond that is 5.11%.

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