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4–22 Yield to Maturity and Yield to Call Arnot International’s bonds have a current market price of $1,200. The bonds have an 11% annual coupon payment, a $1,000 face value, and 10 years left until maturity. The bonds may be called in 5 years at 109% of face value (call price 5 $1,090). a. What is the yield to maturity? b. What is the yield to call if they are called in 5 years? c. Which yield might investors expect to earn on these bonds, and why? d. The bond’s indenture indicates that the call provision gives the firm the right to call them at the end of each year beginning in Year 5. In Year 5, they may be called at 109% of face value, but in each of the next 4 years the call percentage will decline by 1 percentage point. Thus, in Year 6 they may be called at 108% of face value, in Year 7 they may be called at 107% of face value, and so on. If the yield curve is horizontal and interest rates remain at their current level, when is the latest that investors might expect the firm to call the bonds?

Answer 1

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Home nert Page Layout Formulas Data Review View dd-Ins Cut Σ AutoSum ー E " ゴWrap Text ta copy ▼ ,_a. ars-函Merge & Center, $, % , 弼,8 C Paste B 1 u. Conditional Format CeInsert Delete Format Formatting, as Table w styles. ▼ ㆆ ▼ Sort &Find & 2 ClearFe Select Edting Format Painter Clipboard A491 A. Alignment Number Cells 473 474 475 476 477 478 479 a 480 481 b 482 483 484 485 C 486 487 488 489 490 491 ARNOT LIFE COUPON PV 10 YEARS 11% 1200 8.02% EXCEL -RATE(10,-110,1200,-1000) IF CALLABLE IN 5 YEARS CALL PRICE YTC 1090 7.59% EXCEL-RATE(5,-110,1200,-1090) YTC <YTM, BOND WILL BE CALLED IN 5 YEARS, INVESTORS ARE EXPECTED TO EARN 7.59% YIELD SPOT Sheet2 AFN BANKING NOTE BIDDING, UNDERWRITING EUAC AW PM LIFE LP MR INFLATION YIELD WARRANT fund bond CLEAN INVOICE PRICE 014 福 130% 18-01-2019