Question

Last year Carson Industries issued a 10-year, 13% semiannual coupon bond at its par value of $1,000. Currently, the band can be called in 6 years at a price of $1,065 and it sells for $1,270. a. What are the bond's nominal yield to maturity and its nominal yield to call? Do not round intermediate calculations. Round your answers to two decimal places. YTM: YTC: Would an investor be more likely to earn the YTM or the YTC? b. What is the current yield? (Hint: Refer to Footnote 6 for the definition of the current yield and to Table 2.1) Round your answer to two decimal places. Is this yield affected by whether the bond is likely to be called? L. If the bond is called, the capital gains yield will remain the same but the current yield will be different. 11. If the bond is called, the current yield and the capital gains yield will both be different in. If the bond is called, the current yield and the capital gains yield will remain the same but the coupon rate will be different. IV. If the bond is called, the current yield will remain the same but the capital gains yield will be different. V. If the bond is called, the current yield and the capital gains yield will remain the same. c. What is the expected capital gains (or loss) yield for the coming year? Use amounts calculated in above requirements for calculation, if required. Negative value should be indicated by a minus sign. Round your answer to two decimal places Is this yield dependent on whether the bond is expected to be called? 7. The expected capital gains (or loss) yield for the coming year does not depend on whether or not the bond is expected to be called TI. The bond is expected to be called, the appropriate expected total return is the YTM U. If the bond is not expected to be called, the appropriate expected total return is the YC IV. If the bond is expected to be called, the appropriate expected total return will not change. V. The expected capital gains (or loss) yield for the coming year depends on whether or not the bond is expected to be called SW tv

Answer 1

Solution:

Bond Details
Bond Maturity	10 years
Semiannual Coupon Bond
Coupon rate	13%
Par Value	1000
Semiannual Coupon = (0.13/2) *1000 =	65
Current Position:
Time to Maturity	9 years
Callable Price	1065
Years after which bond can be called	6 years
Current selling price of the bond (Bond Value)	1270

a)

YTM

In the time value register put following values:

N = 9*2 = 18

FV = 1000

PV = -1270

PMT = 65

Compute the value of I/Y = 4.3126%

YTM = 4.3126*2=8.62526%

YTM = 8.63

YTC

In the time value register put following values:

N = 6*2 = 12

FV = 1065

PV = -1270

PMT = 65

Compute the value of I/Y = 4.04671%

YTC = 4.04671*2=8.09343%

YTC = 8.09

Investor would more likely to earn YTM

(b)

Current Yield = Annual Coupon payment / Current price = (65*2) / 1270 = 130/1270 = 10.236%

Current Yield = 10.24

IV is correct i.e. If the bond is called, current yield will remain the same but the capital gains yield will be different.

IV

(c)

Capital gains/loss yield

Value of the bond after one year

In the time value register put following values:

N = 8*2 =16

FV = 1000

I/Y = 8.6252/2=4.3126

PMT = 65

Compute the value of PV = -1249.10388

So, Capital gains yield= [(1249.10388 - 1270)/1270]*100 = -1.6453%

Capital gains (or loss) yield = -1.65 V is correct i.e. The expected capital gains (or loss yield) for the coming year depends upon whether or not the bond is expected to be called. V