Question

YIELD TO MATURITY A firm's bonds have a maturity of 14 years with a $1,000 face value, have an 11% semiannual coupon, are callable in 7 years at $1,224, and currently sell at a price of $1,386. a. What is their nominal yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places. % b. What is their nominal yield to call? Do not round intermediate calculations. Round your answer to two decimal places. c. What return should investors expect to earn on these bonds? I. Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM. II. Investors would expect the bonds to be called and to earn the YTC because the YTM is less than the YTC. III. Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM. IV. Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC. V. Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC. -Select-

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

$1,000.00 11% Face value of Bond Coupon rate Coupon frequency Years until maturity Current sale price of Bond Years to Call Call Price 14 $1,386.00 $1,224.00 Nominal yield to maturity 6.71% 10 a. 11 12 b. 13 Nominal yield to call 6.60% C. IV. Investor would not expect the bonds to be called and earn the YTM because the YTM is greater than the YTC

Cell reference -

B 1000 0.11 2 Face value of Bond Coupon rate Coupon frequency Years until maturity Current sale price of Bond Years to Call Call Price 14 1386 1224 Nominal yield to maturity =2*RATE(C5*2,-C3/2*C2,C6,-C2,0) 10 a. 11 12 b. 13 Nominal yield to call =2*RATE(C7*2,-C3/2*C2,C6,-C8,0) c. IV. Investor would not expect the bonds to be called and earn the YTM because the YTM is greater than the YTC

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.