Question

Consider the case of BTR Co.:

BTR Co. has 9% annual coupon bonds that are callable and have 18 years left until maturity. The bonds have a par value of $1,000, and their current market price is $950.35. However, BTR Co. may call the bonds in eight years at a call price of $1,060. What are the YTM and the yield to call (YTC) on BTR Co.’s bonds?

Value:

YTM= a.)9.35% b.)7.36% c.)9.59% d.)7.83%

YTC= a.)10.46% b.)8.88% c.)8.24% d.)9.35%

If interest rates are expected to remain constant, what is the best estimate of the remaining life left for BTR Co.’s bonds?

a. 8 yr

b. 10 yr

c. 18 yr

d. 13 yr

If BTR Co. issued new bonds today, what coupon rate must the bonds have to be issued at par?

a.8.24%

b.9.59%

c.9.35%

d.8.88%

Answer 1

Solution :-

Face Value of Bond ( FV ) = $1,000

Coupon Amount ( Pmt ) = $1,000 * 9% = $90

Price ( PV ) = $950.35

Time to Maturity ( Nper ) = 18

Now Yield to Maturity ( YTM ) =

Fx =RATE(C3,C4,C5,C6) B C D C8 A 1 Solution :- 2 3 Time to Maturity 4 Coupon payment 5 Price 6 Future Value Nper Pmt PV FV 18 $90 ($950.35) $1,000 7 Yield to Maturity YTM 9.59% Formula RATE(C3,C4,C5,C6) 8 9 10 11 12 13

YTM = 9.59% , Therefore Correct Answer is (C)

Now in Case of YTC

Price to call ( FV ) = $1,060

Coupon Amount ( Pmt ) = $1,000 * 9% = $90

Price ( PV ) = $950.35

Time to Call ( Nper ) = 8 Years

Now Yield to Maturity ( YTC ) =

Fax =RATE(C3,C4,C5, C6) B D C8 А 1 Solution :- 2 3 Time to Call 4 Coupon payment 5 Price 6 Price to Call 7 8 Yield to Call 9 10 11 12 13 Nper Pmt PV FV 8 $90 ($950.35) $1,060 YTC 10.46% Formula RATE(C3,C4,C5,C6)

YTC = 10.46% , Therefore Correct Answer is (a )

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