Question

A firm's bonds have a maturity of 14 years with a $1,000 face value, have an 8% semiannual coupon, are callable in 7 years at $1,065.00, and currently sell at a price of $1,122.94. What are their nominal yield to maturity and their nominal yield to call? Do not round intermediate calculations. Round your answers to two decimal places. YTM: 0% YTC: % What return should investors expect to earn on these bonds? I. Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC. II. 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 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. ( -Select-

Answer 1

a). To find the YTM, we need to put the following values in the financial calculator:

N = 14*2 = 28;

PV = -1122.94;

PMT = (8%/2)*1000 = 40;

FV = 1000;

Press CPT, then I/Y, which gives us 3.32

Periodic Rate = 3.32%

So, YTM = Periodic Rate * No. of compounding periods in a year = 3.32% * 2 = 6.64%

b). To find the YTC, we need to put the following values in the financial calculator:

N = 7*2 = 14;

PV = -1122.94;

PMT = (8%/2)*1000 = 40;

FV = 1065;

Press CPT, then I/Y, which gives us 3.265

Periodic Rate = 3.265%

So, YTC = Periodic Rate * No. of compounding periods in a year = 3.265% * 2 = 6.53%

c). Statement "II" is correct.

Since the YTC is less than the YTM, investors would expect the bonds to be called and to earn the YTC.