Question

should investors require on their investment in this funt (1J pomm 4. Inc bonds currently sell for $950 and have a par value of $1,000. They pay a $12% annual coupon and have a 10-year maturity, but they can be called in 3 years at $1,120. a. What is their yield to maturity (YTM)? (5 points) b. What is their yield to call? (5 points) c. Which rate of return is the investor likely to receive? Why do you think so? (5 points)

Answer 1

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

N = 10;

PV = -950;

PMT = 12%*1000 = 120;

FV = 1000;

Press CPT, then I/Y, which gives us 12.92%

So, YTM = 12.92%

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

N = 3;

PV = -950;

PMT = 12%*1000 = 120;

FV = 1120;

Press CPT, then I/Y, which gives us 17.66%

So, YTC = 17.66%

c). YTC will be higher than YTM since the bond will appreciate more rapidly with call to at least par and perhaps even greater call price. We would expect to earn YTM.

The bond will never be called under those circumstances, the caller would lose money by issuing the call.