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Intro A corporate bond pays interest twice a year and has 18 years to maturity, a face value of $1,000 and a coupon rate of 5
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Answer #1

Answer a.

Face Value = $1,000
Current Price = $1,373.42

Annual Coupon Rate = 5.70%
Semiannual Coupon Rate = 2.85%
Semiannual Coupon = 2.85% * $1,000
Semiannual Coupon = $28.50

Time to Maturity = 18 years
Semiannual Period to Maturity = 36

Let Semiannual YTM be i%

$1,373.42 = $28.50 * PVIFA(i%, 36) + $1,000 * PVIF(i%, 36)

Using financial calculator:
N = 36
PV = -1373.42
PMT = 28.50
FV = 1000

I = 0.0150

Semiannual YTM = 0.0150
Annual YTM = 2 * 0.0150
Annual YTM = 0.0300

Answer b.

Call Value = $1,076.00
Current Price = $1,373.42
Semiannual Coupon = $28.50

Time to Call = 12 years
Semiannual Period to Call = 24

Let Semiannual YTC be i%

$1,373.42 = $28.50 * PVIFA(i%, 24) + $1,076.00 * PVIF(i%, 24)

Using financial calculator:
N = 24
PV = -1373.42
PMT = 28.50
FV = 1076

I = 0.0130

Semiannual YTC = 0.0130
Annual YTC = 2 * 0.0130
Annual YTC = 0.0260

Answer c.

Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.

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