Question

A(n) 10​%, ​25-year bond has a par value of​ $1,000 and a call price of $1,050. ​(The bond's first call date is in 5​ years.) Coupon payments are made semiannually​ (so use semiannual compounding where​ appropriate).

a. Find the current​ yield, YTM, and YTC on this​ issue, given that it is currently being priced in the market at $1,175. Which of these 3 yields is the​ highest? Which is the​ lowest? Which yield would you use to value this​ bond? Explain.

b. Repeat the 3 calculations​ above, given that the bond is being priced at ​$825. Now which yield is the​ highest? Which is the​ lowest? Which yield would you use to value this​ bond? Explain.

QUESTIONS: *thumbs up for correct answer*

a. If the bond is priced at $1,175​, the current yield is (blank)% ?

The annual​ yield-to-maturity with semiannual compounding is (blank)% ?

The annual​ yield-to-call with semiannual compounding is (blank) % ?

(Blank) yield is the highest, while (blank) yield is the lowest *current yield, yield to call, or yield to maturity*

Which yield would you use to value this​ bond? (mult choice)

A.It​ doesn't matter which yield you use.

B.The​ yield-to-call because convention is to use the lower more conservative measure of yield.

C.The​ yield-to-maturity is always used.

D.The​ yield-to-maturity because the bonds may not be called.

b. If the bond is priced at ​$825 the current yield is (blank) % ?

The annual​ yield-to-maturity with semiannual compounding is (blank) % ?

The annual​ yield-to-call with semiannual compounding is (blank) % ?

(Blank) yield is the highest, while (blank) yield is the lowest *current yield, yield to call, or yield to maturity*

Answer 1

Pt a

Current Yield= Coupon Amount/Bond Price

                        =1000*10%/1175 ie.8.511%

Yield to maturity = {Coupon amount + (Face value – Purchase price)/years until maturity} / {Face value + Purchase price/2}

                              = {(1000*10%)+(1000-1175)/25}/{(1000+1175)/2}

                              =8.552%

YTC = { Coupon Interest Payment + ( Call Price - Market Value )/ Number of Years Until Call }/ {( Call Price + Market Value ) / 2 }

        = {(1000*10%)+(1050-1175)/5}/{(1050+1175)/2}

          =6.742%

YTM is the highest yield and YTC is the lowest yield.

Since the bond is callable bond and can be called before maturity due to which the amount receivable by the bond holder may be reduced if the company exercise it right to call the bond so the bond is valued using YTC.

Pt B

Current Yield= Coupon Amount/Bond Price

                        =1000*10%/825 ie.12.121%

Yield to maturity = {Coupon amount + (Face value – Purchase price)/years until maturity} / {Face value + Purchase price/2}

                              = {(1000*10%)+(1000-825)/25}/{(1000+825)/2}

                              =11.726%

YTC = { Coupon Interest Payment + ( Call Price - Market Value )/ Number of Years Until Call }/ {( Call Price + Market Value ) / 2 }

        = {(1000*10%)+(1050-825)/5}/{(1050+825)/2}

          =15.467%

YTC is the highest yield and YTM is the lowest yield.

Since the bond is callable bond and can be called before maturity due to which the amount receivable by the bond holder may be reduced if the company exercise it right to call the bond so the bond is valued using YTC.