Question

A 10 year , 12 percent semiannually coupon with a par value of $1000, may be called in 4 years at a call price of $1060.The bond sell for $1100.(Assume that the bond has just been issued)

a) what is the bond's yield to maturity?

b) what is the bond's current yield?

C) What is the bond's capital gain or loss yield

d)What is the bond's yield to call ?

Answer 1

a) FV = $1000

N= 20 YEARS

PV = ($1100)

PMT = $60

Solve for I/Y, we get 5.1849. However, this is a periodic rate. The nominal annual rate = 5.1849%(2) = 10.3699% ≈ 10.37%.

b) Bond's current yield

= $120/$1100

=10.91%

c) YTM = current yield + capital gains(loss) yield

10.37% = 10.91% + capital loss yield

-0.54% = capital loss yield

d) FV = $1060, PV =( $1100 ) ,N= 8 YEARS, PMT = $60,(n =8 , as the bond can be called in 4 years and it is semi-annual compounding ).

SOLVE FOR I/Y = 5.0748, Now this is the semi-annual rate, annual rate = 10.1496% or 10.15%.