Question

Intro A corporate bond pays interest twice a year and has 18 years to maturity, a face value of $1,000 and a coupon rate of 5.7%. The bond's current price is $1,373.42. It is callable starting 12 years from now (years to call) at a call price of $1,076. Attempt 2/5 for 9 pts. Part 1 What is the bond's yield to maturity? Enter your answer as a decimal. 4+ decimals Submit Attempt 1/5 for 10 pts. Part 2 What is the bond's yield to call? Enter your answer as a decimal. 4+ decimals Submit Part 3 - Attempt 1/3 for 10 pts. If you buy the bond today and interest rates do not change in the future, which rate of return can you expect to earn? The yield to call (YTC) The yield to maturity (YTM) Submit

Answer 1

Answer a.

Face Value = $1,000
Current Price = $1,373.42

Annual Coupon Rate = 5.70%
Semiannual Coupon Rate = 2.85%
Semiannual Coupon = 2.85% * $1,000
Semiannual Coupon = $28.50

Time to Maturity = 18 years
Semiannual Period to Maturity = 36

Let Semiannual YTM be i%

$1,373.42 = $28.50 * PVIFA(i%, 36) + $1,000 * PVIF(i%, 36)

Using financial calculator:
N = 36
PV = -1373.42
PMT = 28.50
FV = 1000

I = 0.0150

Semiannual YTM = 0.0150
Annual YTM = 2 * 0.0150
Annual YTM = 0.0300

Answer b.

Call Value = $1,076.00
Current Price = $1,373.42
Semiannual Coupon = $28.50

Time to Call = 12 years
Semiannual Period to Call = 24

Let Semiannual YTC be i%

$1,373.42 = $28.50 * PVIFA(i%, 24) + $1,076.00 * PVIF(i%, 24)

Using financial calculator:
N = 24
PV = -1373.42
PMT = 28.50
FV = 1076

I = 0.0130

Semiannual YTC = 0.0130
Annual YTC = 2 * 0.0130
Annual YTC = 0.0260

Answer c.

Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.