In the section on the yield to call, a bond pays annual interest of $80 and...
In the section on the yield to call, a bond pays annual interest of $80 and matures after ten years. The bond is valued at $1,147 if the comparable rate is 6 percent and the bond is held to maturity. If, however, an investor expects the bond to be called for $1,050 after five years, the value of the bond would be $1,122. Investor A expects the bond to be called and investor B expects the bond not to be called. Investor A sells the bond to B for $1,122. What is the annual return earned by B if the bond is not called? Why is this yield greater than the 6 percent earned on comparable securities?
Homework Answers
=RATE(10,80,-1122,1000)
=6.32%
As the bond is selling for less than 1147 its fair price in case
of not being called, the return is more than 6%
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Appendix B
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