Question

Kaufman Enterprises has bonds outstanding with a $1,000 face value and 11 years left until maturity. They have an 11 % annual coupon payment, and their current price is $1,300. The bonds may be called in 4 years at 103% of face value. a. What is the yield to maturity? b. What is the yield to call? a) 3.54%; b) 7.00% a) 11.00 %; b ) 7.00% a) 7.00%; b) 3.54% a) 3.54%; b) 11.00%

Answer 1

(a) Number of Years to Maturity = 11

PMT = 11%*1000 = $110

Par Value= $!000

Market Price = $1300

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

= (110 + (1000 - 1300)/11) / ((1000 + 1300)/2) = 0.0719 or 7.19%

(b) Yield to Call YTC = (Coupon Payment + (Call Price - Market Value)/Number of Years to call)/((Call Price + Market Value)/2)

Face Value = $1000

Coupon Payment = 11% of $1000 = $110

Call Price = 103% of $1000 = $1030

Market Value = $1300

Number of Years to Call = 4

Hence, YTC = (110 + (1030 - 1300)/4)/((1030 + 1300)/2) = 0.0364 or 3.64%

Hence, correct option is a)7.00% b) 3.54%